Many small business owners are seeing a flurry of headlines. Much has changed in just a handful of days. Silicon Valley Bank, the 16th largest bank in the United States, has failed. While the situation is fluid, what is most important is that we are in a starkly different environment than in 2008. This is not something to be ignored, and for the vast majority of small businesses, the answer right now is diligence and prudent strategy, not panic.
This is not 2008. What led to the failure in this case is more isolated and the federal government has taken some quick steps to shore up the situation. While there still could be other dominoes to fall, the biggest risk appears to be an unchecked psychological panic more than systemic issues.
First, some important background information and key recent developments:
• The FDIC provides a guaranty by insuring deposits up to $250,000 in a given bank. What is critical to note is that the federal government took action over the weekend and ensured that all deposits will be protected at the seized banks (read the press release here). This is a critically important step as customers do not need to fear broader access to liquidity.
• Silicon Valley Bank and Signature Bank, which failed over the weekend, were the 2nd and 3rd largest bank failures in history. That is a headline, but also a little misleading. The overall economy has grown in magnitude since the run of failures in 2008, and banks have consolidated dramatically from over 7,000 in the US in 2008, to under 5,000 today.
• SVB had a liquidity crisis cause its demise. This was due in part to significant exposure in largely one asset class – tech – as those companies struggled recently, they burned through cash (taken out of the bank) and the wave of IPO’s and deals ceased (not putting money back in the bank). Banks make investments in assets with their portfolios – in SVBs case, these assets suffered dramatically in value due to rising interest rates (bonds and treasuries with huge unrealized losses). When customers started pulling cash and the bank could not liquidate these assets for sufficient proceeds, a perfect storm was born – a massive liquidity crunch. Importantly, it did not fail due to bad loans, which is what in large part plagued us in 2008. In many indicators of bank health, SVB was performing fine – it simply did not have liquidity for a run like this – it’s loan portfolio did not crater it, it was access to cash.
• Signature Bank had heavy crypto exposure – details there are still fluid, but again appears localized in nature as a result.
• Morningstar published a watchlist of other banks in similar situations with potential unrealized losses. A bank of concern that was on the watch list – First Republic, was able to shore up its funding, stemming a further spread. Another good sign.
The situation will continue to evolve, so here is what matters short term:
• Do not panic, psychological panic is far more troublesome than systemic issues.
• Revisit your own liquidity position. Do you have enough cash on hand? How do you know?
• We have seen some larger banks reach out to small businesses using fear as a tactic regarding their current bank. It may well be prudent to have cash at multiple banks, but there is no reason to rush out and do so today, this needs to be a strategic move, not one of fear.
• If you have a bank facility renewing in the next 3 to 6 months, talk to your lender as soon as possible to understand where you sit. Tightening lending standards were already occurring, and this could further do so.
• Watch what happens to interest rates. There is widespread expectation now by economists that the Fed may hold off or shrink expected increases. What does this mean for your business?
• On a related note, be vigilant about phishing attempts in the coming days and weeks. There could be increases in vendor payment account change requests as a result of banking relationship changes, so it’s a good idea to take extra precautions to authenticate communications regarding changes to payment accounts.
More to come as things evolve. Stay strong. We will get through this. Grow boldly.