Silicon Valley Bank (SVB) has long been known as the bank of choice for tech startups, but its recent failure has sent shockwaves through the venture capital ecosystem, leaving many in the industry with a looming capital crunch. The bank had more than 2,500 fintech clients, including Circle, which had a $3.3 billion deposit balance with SVB.
Zombie VCs Loom Large
Up to half of all venture capital firms, primarily small to midsize companies, may be unable to raise the next round of funding, leading to the rise of “zombie VCs”. Startups that need funds could also face difficulties in raising capital due to a lack of available debt offerings. Venture-backed companies were already facing a capital crunch after market volatility forced investors to slow deal-making and set higher benchmarks for financing.
CB Insights projects a significant decline in venture outfit investments in the first quarter of 2023, with a low amount of capital available for every stage and a swift dropoff in deals. Startups are forced to raise equity financing sooner under less favorable conditions due to the lack of access to venture debt, leading to down rounds. The cost of capital for startups is expected to go higher, both in equity and debt.
Consumer fintech companies are expected to be most affected by the failure of Silicon Valley Bank since most of the bank’s clients account for all fintech initial public offerings since 2020. Venture capital and private-equity firms that banked with SVB can’t access uninsured deposits yet. If they were drawing lines of credit from SVB, they also can’t tap those funds.
Unbundling Payments from Banking
The close link between payments and banking is an artificial construct shaped by exclusive access to payment rails granted by the US government. Broadening access to payment rails, such as Fedwire and FedNow, to regulated non-bank financial entities and payment service providers would reduce bank-centric payments’ concentration and too-big-to-fail risks.
Reducing commercial banks’ role in payments would free up payment-related reserves to focus on lending activities, reducing regulatory burden and supplementary leverage ratio. The volume of physical currency in circulation can also be lessened by issuing properly regulated, non-bank payment service providers’ cash-like liabilities backed by short-term high-quality liquid assets and tokenizing these liabilities on a distributed ledger, thereby diversifying risks away from too-big-to-fail financial institutions.
Unbundling payments from banking serves to reduce risks and fortify the financial system, allowing the central bank to pursue its dual mandate of balancing inflation risk and unemployment more effectively.
Impact on Bank Savings Rates
Jittery depositors shifting their money from regional banks to large ones, led some banks to lift their savings account and CD rates to incentivize customers. Banks want to shore up their deposits to reduce the odds of being hurt by a bank run. Some online banks have increased deposit rates because it’s easier for their customers to move money to competitors.
Ally Bank jacked up the rate of its 11-month no-penalty CD from 4% to 4.75% just after Silicon Valley Bank’s failure, to reduce outflows of deposits from skittish customers. The crisis has caused banks to snare a share of the deposits ricocheting through the banking system. Physical banks have nudged up savings rates slightly to 0.35%, but online banks have been more aggressive with the average online savings rate at 3.52%.
Some analysts don’t see a direct connection between the bank crisis and higher savings or CD rates, as banks in a rising rate environment have repeatedly increased their payouts to remain competitive. Citizens Access, the online unit of Citizens Bank of Providence, Rhode Island, raised its online savings rate from 3.75% to 4.25%, but bank officials say the move was planned before Silicon Valley’s problems.
Conclusion
As Silicon Valley Bank struggles to recover from its massive losses, its impact is being felt far beyond the walls of the bank itself. The failure highlights the need to unbundle payments from banking to reduce systemic risk and fortify the financial system. The venture capital ecosystem and startup funding may face difficulties as up to half of all venture capital firms may be unable to raise the next round of funding. The crisis also leads some banks to lift their savings account and CD rates to incentivize customers, causing a share of the deposits ricocheting through the banking system. Unbundling payments from banking serves as a potential solution for reducing risks and fortifying the financial system while allowing central banks to pursue their mandates of balancing inflation risk and unemployment more effectively.
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