SVB Will Not Crash the Banking System

But it might bridge the divide between Main Street and Silicon Valley.

By Ami Kassar

The quick fall of Silicon Valley Bank has rattled financial markets and created fears about the beginning of a new financial crisis. While the problems with SVB will undoubtedly cause some pain in sectors of the economy, in my opinion, we should all take a deep breath. Silicon Valley Bank is an anomaly in the banking system. There is no need to rush to take money from banks and stick it under mattresses.

I have watched Silicon Valley Bank over the years and was always curious about how they got away with their work as an FDIC bank. They were always making aggressive loans that most others would never touch – and playing in a different league. It seemed that their primary clients and buddies were the world’s venture capitalists and private equity folks, and they managed to lend their companies money at terms that most other banks wouldn’t. So they were “other people’s money” for their equity and venture friends, which let them extend their leverage.

The Story In The Press

So much of the story in the press is about all these “start-ups” at risk. But let’s be clear: These aren’t companies in small garages just getting going. These are much bigger start-ups that have venture capital behind them. Their VC funds might need to ante up and help their companies out of the crisis they helped create with their banking friends. So I don’t buy it when some, like Mark Cuban, call for a government bailout. Equity investors might need to take it in the shorts, and help their companies. [Editor’s note: The federal government has since announced that it will guarantee all of the bank’s deposits.]

Another part of the story in the press is that the rise in interest rates caused this mess and that the Feds are to blame. While I am sure the increased rates helped to precipitate the crisis or might have been the last straw, it’s hard to believe that this is the root of the problem. Yes, rates are up – but the economy is still thriving, and most companies I know are managing through it.

One area of more significant concern is the impact that this crisis could have as companies around the country try to process payrolls. For example, at MultiFunding, we use Gusto, and I was shocked to get an email from them over the weekend letting me know that our payroll would still be OK this week. I hadn’t thought twice about any impact of SVB on my company until I got the email. I hope that these dominoes will be sorted quickly.

Regulations Matter

It will take a long time before all the layers of the SVB onion get peeled, but eventually, the truth will come out. Here is my bet: Somehow, SVB managed to play under a different set of rules than other FDIC banks. They managed to push the envelope and get away with making loans that 99 percent of banks would never touch. The question is how this happened. Banking rules and regulations are frustrating, but they matter and are there for a reason.

Take A Pause

I hope I am right, but I don’t believe the demise of SVB is the beginning of a more significant banking crisis. They were not a regular bank, They played by different rules and managed to get big. They are not the norm. 

Perhaps one domino of the SVB debacle that will fall is the divide between Silicon Valley and Main Street. If some of the tools that Silicon Valley companies had available to them will now go away, their entire ecosystem will have to adjust. In this process, Silicon Valley companies might need to start thinking and acting more like Main Street companies and playing by their rules. 

Ami Kassar is CEO of MultiFunding.

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