Federal regulators are trying hard to resuscitate Silicon Valley Bank and make it attractive to buyers, an effort that seems to be working.
The Silicon Valley Bridge Bank, as the entity is now known, is luring customers back by relaxing deposit requirements for borrowers. Until last week, SVB mandated startups with venture debt lines to keep all their capital at the institution.
The bridge bank’s latest move gives borrowers the best of both worlds. They can diversify where they keep their capital and, at the same time, retain their relatively inexpensive loan facility.
In light of the bank’s failure, the government-controlled SVB has moved their deposit requirement to as little as 50% for borrowers.
Investors have been preaching banking diversification, and many borrowers would have left the bank had it not eased the requirement, according to Chris Olsen, co-founder of Drive Capital.
But now, with part of deposits in a different institution, startups with attractive loan terms have a significant incentive to stay.
“What I’m advising founders that have a facility at SVB, draw 100% of it now,” said Zack Ellison, CIO of Applied Real Intelligence, a venture debt firm. Because credit risk has increased significantly, other venture debt providers are becoming extremely selective on who they lend to.
David Spreng, the chief executive at venture debt firm Runway Growth Capital also thinks it’s wise to stay with SVB and take the entirety of the loan. “The capital at SVB is fairly cheap. I think there might be a challenge to replicate it with another early-stage lender,” he said.
Since borrowers can keep a portion of the capital elsewhere, there is little risk in following Ellison’s and Spreng’s advice. As long as SVB is in the hands of the government, it may be the safest bank on earth. And even though the ultimate buyer of the institution will not guarantee all deposits, having a part of the company’s capital at another bank significantly reduces the risks that many companies faced after SVB failed.
“If you had 100% of your money at Silicon Valley Bank, you couldn’t make payroll. That was the drama we were all dealing with last weekend,” said Noah Breslow, a partner with Bain Capital Ventures. “If you have at least 50% somewhere else, you wouldn’t have the same drama.”
The events of last week were potentially so damaging that the entire industry is expected to change the rules on deposit requirements for borrowers.
“I believe that the banks are not going to push you to have 100% of your deposits with them in order to issue a line of credit,” said Hemant Taneja, CEO of General Catalyst. “I think the industry will innovate itself around this need for diversification.”
Featured image by Anadolu Agency/Getty Images
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