The financial institution best known for its relationships with high-flying tech startups and venture capital firms, Silicon Valley Bank, experienced one of the oldest problems in banking — a bank run — which led to its failure on Friday.
Some startups that had ties to the bank scrambled to pay their workers, and feared they might have to pause projects or lay off employees until they could access their funds.
California Gov. Gavin Newsom said Saturday that he’s talking with the White House to help “stabilize the situation as quickly as possible, to protect jobs, people’s livelihoods, and the entire innovation ecosystem that has served as a tent pole for our economy.”
How did this happen? Here’s what to know about why the bank failed, who was affected most, and what to know about how it may, and may not affect, the wider banking system in the U.S.
Why it failed
Silicon Valley Bank was hit hard by the downturn in technology stocks over the past year as well as the U.S. Federal Reserve’s aggressive plan to increase interest rates to combat inflation.
Vehicles are parked outside a Silicon Valley Bank branch in Wellesley, Mass., on Saturday. (Peter Morgan/The Associated Press)
The bank bought billions of dollars worth of bonds over the past couple of years, using customers’ deposits as a typical bank would normally operate. These investments are typically safe, but the value of those investments fell because they paid lower interest rates than what a comparable bond would pay if issued in today’s higher interest rate environment.
Typically that’s not an issue, because banks hold onto those for a long time — unless they have to sell them in an emergency.
But Silicon Valley’s customers were largely startups and other tech-centric companies that started needing cash more over the past year. Venture capital funding was drying up, companies were not able to get additional rounds of funding for unprofitable businesses, and therefore had to tap their existing funds — often deposited with Silicon Valley Bank, which sat in the centre of the tech startup universe.
So Silicon Valley customers started withdrawing their deposits. Initially that wasn’t a huge issue, but the withdrawals started requiring the bank to start selling its own assets to meet customer withdrawal requests. Because Silicon Valley customers were largely businesses and the wealthy, they likely were more fearful of a bank failure since their deposits were over $250,000 US, which is the U.S. government-imposed limit on deposit insurance.
That required selling typically safe bonds at a loss, and those losses added up to the point that Silicon Valley Bank became effectively insolvent. The bank tried to raise additional capital through outside investors, but was unable to find them.
The fancy tech-focused bank was brought down by the oldest issue in banking — a run on the bank.
The entrance to a Silicon Valley Bank in Menlo Park, Calif., is seen on Friday. (Michaela Vatcheva/Reuters)
Bank regulators had to seize Silicon Valley Bank’s assets to protect the assets and deposits remaining at the bank.
San Francisco-based employee performance management company Confirm.com was among the Silicon Valley Bank depositors that rushed to pull their money out before regulators seized the bank.
Co-founder David Murray credits an email from one of Confirm’s venture capital investors, which urged the company to withdraw its funds “immediately,” citing signs of a run on the bank.
Such actions accelerated the flight of cash, which led to the bank’s collapse.
What happens next?
There are two large problems remaining with Silicon Valley Bank. Both could lead to further issues if not resolved quickly.
The most immediate problem is Silicon Valley Bank’s large deposits. The U.S. government insures deposits to $250,000, but anything above that level is considered uninsured. The Federal Deposit Insurance Corporation said insured deposits would be available on Monday morning. However the vast majority of Silicon Valley Bank’s deposits were uninsured, a unique characteristic of the bank due to its customers being largely startups and wealthy tech workers.
People stand outside of an entrance to Silicon Valley Bank in Santa Clara, Calif., on Friday. (Jeff Chiu/The Associated Press)
At the moment, all of that money can’t be accessed and likely will have to be released in an orderly process. But many businesses cannot wait weeks to access funds to meet payroll and office expenses.
Tara Fung, co-founder and CEO of tech startup Co:Create, said her firm uses multiple banks besides Silicon Valley Bank and was able switch over its payroll and vendor payments to another bank.
Her firm chose the bank as a partner because it is the “gold standard for tech firms and banking partnerships,” and she was upset that some people seemed to be gloating about its failure.
A second key problem is there’s no buyer of Silicon Valley Bank. Typically bank regulators look for a stronger bank to take on the assets of a failing bank, but in this case, another bank hasn’t stepped forward.
A bank buying Silicon Valley Bank could go a long way to resolving some of the problems tied with the money that startups can’t access right now.
Any sign of a repeat of 2008?
At the moment, no, and experts don’t expect there to be any issues spreading to the broader banking sector.
Silicon Valley Bank was large but had a unique existence by servicing nearly exclusively the technology world and VC-backed companies. It did a lot of work with the particular part of the economy that was hit hard in the past year.
Other banks are far more diversified across multiple industries, customer bases and geographies. The most recent round of “stress tests” by the Federal Reserve of the largest banks and financial institutions showed that all of them would survive a deep recession and a significant drop in unemployment.
However there might be economic ripple effects in the Bay Area and in the technology startup world if the remaining money can’t be released quickly.
TORONTO – Roots Corp. may have built its brand on all things comfy and cosy, but its CEO says activewear is now “really becoming a core part” of the brand.
The category, which at Roots spans leggings, tracksuits, sports bras and bike shorts, has seen such sustained double-digit growth that Meghan Roach plans to make it a key part of the business’ future.
“It’s an area … you will see us continue to expand upon,” she told analysts on a Friday call.
The Toronto-based retailer’s push into activewear has taken shape over many years and included several turns as the official designer and supplier of Team Canada’s Olympic uniform.
But consumers have had plenty of choice when it comes to workout gear and other apparel suited to their sporting needs. On top of the slew of athletic brands like Nike and Adidas, shoppers have also gravitated toward Lululemon Athletica Inc., Alo and Vuori, ramping up competition in the activewear category.
Roach feels Roots’ toehold in the category stems from the fit, feel and following its merchandise has cultivated.
“Our product really resonates with (shoppers) because you can wear it through multiple different use cases and occasions,” she said.
“We’ve been seeing customers come back again and again for some of these core products in our activewear collection.”
Her remarks came the same day as Roots revealed it lost $5.2 million in its latest quarter compared with a loss of $5.3 million in the same quarter last year.
The company said the second-quarter loss amounted to 13 cents per diluted share for the quarter ended Aug. 3, the same as a year earlier.
In presenting the results, Roach reminded analysts that the first half of the year is usually “seasonally small,” representing just 30 per cent of the company’s annual sales.
Sales for the second quarter totalled $47.7 million, down from $49.4 million in the same quarter last year.
The move lower came as direct-to-consumer sales amounted to $36.4 million, down from $37.1 million a year earlier, as comparable sales edged down 0.2 per cent.
The numbers reflect the fact that Roots continued to grapple with inventory challenges in the company’s Cooper fleece line that first cropped up in its previous quarter.
Roots recently began to use artificial intelligence to assist with daily inventory replenishments and said more tools helping with allocation will go live in the next quarter.
Beyond that time period, the company intends to keep exploring AI and renovate more of its stores.
It will also re-evaluate its design ranks.
Roots announced Friday that chief product officer Karuna Scheinfeld has stepped down.
Rather than fill the role, the company plans to hire senior level design talent with international experience in the outdoor and activewear sectors who will take on tasks previously done by the chief product officer.
This report by The Canadian Press was first published Sept. 13, 2024.
VANCOUVER – Mediated talks between the union representing HandyDART workers in Metro Vancouver and its employer, Transdev, are set to resume today as a strike that has stopped most services drags into a second week.
No timeline has been set for the length of the negotiations, but Joe McCann, president of the Amalgamated Transit Union Local 1724, says they are willing to stay there as long as it takes, even if talks drag on all night.
About 600 employees of the door-to-door transit service for people unable to navigate the conventional transit system have been on strike since last Tuesday, pausing service for all but essential medical trips.
Hundreds of drivers rallied outside TransLink’s head office earlier this week, calling for the transportation provider to intervene in the dispute with Transdev, which was contracted to oversee HandyDART service.
Transdev said earlier this week that it will provide a reply to the union’s latest proposal on Thursday.
A statement from the company said it “strongly believes” that their employees deserve fair wages, and that a fair contract “must balance the needs of their employees, clients and taxpayers.”
This report by The Canadian Press was first published Sept. 12, 2024.
MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.
The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.
The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.
This report by The Canadian Press was first published Sept. 12, 2024.
