SVB rescue: Depositors to get money back under US backstop

The US government stepped in to protect Silicon Valley Bank customers' funds on Sunday in a bid to prevent contagion from spreading across the financial system. And it's asking other banks to pick up the tab.

The extraordinary response is a saving grace for startups and other companies whose SVB funds have been locked up in the failed bank since its stunning collapse and seizure by bank regulators last week. 

While the arrangement solves the urgent problem of allowing SVB business customers to make payroll, it left other questions unanswered for now, such as what will become of the bank's assets and what kind of fallout is awaiting startups that will depend on venture debt in a difficult economic environment.

In recent days, many companies had scrambled to secure loans from investors and third parties. SVB held around $170 billion of deposits, the vast majority of which wasn't insured by the FDIC.

Chris Farmer, founder of venture firm SignalFire, said that about six of his firm's portfolio companies wouldn't be able to make the next payroll if they couldn't get access to their SVB accounts. 

"We were prepared for lots of contingencies, including total disasters, but we didn't pull the trigger on them," Farmer said. "I had a feeling that we would get a resolution."

Treasury Secretary Janet Yellen gave the FDIC approval to fully protect depositors with funds at Silicon Valley Bank. Also covered by that move is Signature Bank, which was seized by state regulators in New York. The costs associated with protecting customers will be paid with a special assessment on other banks. Taxpayers won't be on the hook, the Treasury, Federal Reserve and the FDIC said in a joint statement.

In addition to the FDIC's actions, the Federal Reserve launched a loan program to help banks satisfy depositor withdrawals. Under the program, banks, savings associations, credit unions and other eligible firms can receive asset-backed loans for up to one year. The Treasury is backstopping the program with $25 billion.

Officials said customers of SVB and Signature Bank will have access to their money on Monday. Shareholders and some debtholders, by contrast, won't receive protection under the rescue plan.

SVB depositors panicked following a major restructuring of the bank's balance sheet last Wednesday, spurring a run on the bank. The nation's 16th largest bank was shut down on Friday, leaving SVB's future and that of its depositors up in the air.

Prior to Sunday's announcement, the only certainty for businesses that banked with SVB was that they would have access to $250,000 on Monday. That sum would have barely lasted one payroll cycle for Series B and later startups. 

With that dilemma looming over account holders, an untold number of companies had spent the weekend seeking out loans and looking for ways to reduce their cash burn with the knowledge that payroll would be due on Wednesday.

Over the weekend, lenders and all manner of financial institutions were approaching startups with proposals of emergency loans or with offers to purchase their SVB deposits—at a steep discount. 

"There were a lot of third parties that came in with pretty egregious,  predatory terms," Farmer said. "Jefferies, for example, were willing to buy that interest for 70 cents on the dollar."
 
Other startups were trying to receive free credit or loans with favorable terms from their current investors. 

In announcing the rescue, officials gave no indication whether a buyer was being lined up to acquire SVB's assets. 

For startups, the fate of the bank's venture loan book is of particular concern. Companies that had received venture debt loans but hadn't drawn on them now face the prospect of having to replace that credit—under tougher and more expensive terms.

Phil Libin, a former managing director with General Catalyst and co-founder of Mmhmm and venture studio All Turtles, said that a part of his companies' funds were in SVB. 

"We were in a lucky position," he said. "We don't need access to everything in the treasury for years. I wasn't worried about our business, but I was worried about the effects on the ecosystem." 

Libin said he was relieved that the government reached a swift resolution that's also favorable to taxpayers and depositors. 

"It was a very, very chaotic weekend," said Libin. "If all it was is one horrible weekend, then we should [feel] lucky."
 

Related read: Venture Debt as the Market Turns

Featured image by Drew Angerer/Getty