A Perth-based businessman who oversaw the transformation of a small Californian community bank into the $220 billion Silicon Valley Bank believes US regulators took too long to reassure depositors at the now stricken institution.
Larry Lopez, a former managing director of Silicon Valley Bank and other arms of the SVB Financial group between 1989 and 2006, believes the Federal Deposit Insurance Corporation could have moved earlier to douse the anxiety of depositors who ploughed US$170 billion into the bank.
The FDIC last week seized control of customer accounts at SVB after thousands of accountholders rushed to pull cash out of the bank.
US regulators confirmed yesterday that SVB depositors would have access to all their funds this week with no losses being borne by taxpayers.
While the announcement ends five days of mounting concerns about the safety of depositors’ cash, Lopez insists that regulators were in a position to make the call much earlier.
“Since news of the bank’s problems broke on Wednesday there was always adequate balance sheet coverage for the depositors,” Lopez told Banking Day.
“There was never any doubt in my mind that depositors would be made whole and I was surprised it took regulators until today (Monday 13 March Australian time – Sunday 12 March in New York) to confirm that.”
A raft of Australian fintechs and venture capital firms have deposits at SVB.
The list includes ASX-listed companies Sezzle, Life360, Nitro Inc and Melbourne-based technology investor, Square Peg.
Although US regulators indicated taxpayers would not be required to foot any of the costs for making whole the losses of SVB depositors, they did not confirm there was sufficient cash at the bank to cover all deposit liabilities.
While the FDIC and the Federal Reserve avoided use of the term “bailout” in a joint statement, the NPR news service reported unnamed officials saying that the depositor restitution program involved “tapping a deep reserve of bank-funded federal insurance money”.
Most of SVB’s depositors were startup companies and venture capital firms, and the run on the bank last week appears to have been triggered by negative commentary about the condition of the company’s balance sheet in a US venture capital newsletter.
The commentary highlighted shortcomings in SVB’s 2022 financial accounts that were released on 24 February.
SVB’s accounts included details about a material blowout in unrealised losses on the bank’s investment portfolios.
The most worrying disclosures related to mark-to-market losses totalling US$16 billion on held-to-maturity mortgage securities in the 12 months to the end of December.
These unrealized losses were compounded by the bank’s apparent decision not to run an interest rate hedge over the portfolio.
The disclosures were sufficient for the newsletter’s publisher Byrne Hobart to advise readers with deposits at SVB that the bank was “technically insolvent”.
“No-one wants to look paranoid by being the first to move their money out, but no one wants to deal with the consequences of being the last,” Hobart told his subscribers in the venture capital sector.
Over the next few days SVB’s depositors pulled more than US$40 billion from the bank, forcing California’s state government to freeze SVB’s operations and appoint the FDIC as receiver.
Lopez, who has spoken with former colleagues at the bank since the FDIC takeover last Friday, said it was “a tragedy” for SVB staff and customers that poor balance sheet management had destroyed the company.
“I think it’s a tragedy for the employees and shareholders,” he said.
“Duration squeezes are a bank’s worst nightmare, but clearly it shouldn’t have happened.
“The bank probably believed that its deposits would keep growing and that rates were not going to accelerate as fast as they did.
“Matching current deposits to investments is always hard.”
Lopez said the bank’s core businesses appeared to be perform adequately in the last 12 months, with few material signs of borrower stress undermining loan quality.
“Based on what I know the credit quality was sound – the bank vaporised on the balance sheet mismatch between its deposits and the duration profile of the bond portfolio,” he said.
“I’m not saying it was easy to prevent but with hindsight you expect more would have been done to prevent putting the bank in a duration squeeze.”
Lopez, who is married to an Australian, left SVB in 2006 and then settled in Perth where he has become an influential figure in the local startup community.
After leaving the US he continued to work as an adviser to SVB’s funds management arm for many years but in the last decade took on various roles at Curtin University and venture capital funds around the country.
In January last year he was appointed a director of the WA Government’s New Industries Investment Attraction Fund.
Lopez said he felt a sad about SVB’s demise.
“From a personal point of view I’m very sad,” he said.
“The bank was a big part of the legacy of my working life and now it’s not there anymore.”
He said long-serving staff of the bank were still in shock over the bank’s collapse.
“It’s a disappointment because SVB was a great place to work,” he said.
“It had something special in terms of its commitment to fintechs and startups in general.
“A big part of the bank’s culture was about cultivating kindness and humility in employees.”
Longstanding critics of SVB regularly highlighted what they judged to be a range of concentration risks in the bank’s business model, particularly its geographical focus on California’s startup and venture capital sectors.
Lopez believes the geographic and industry concentration risks were not as great as critics suggested.
“We did think about that issue a lot as we went from being a community bank to a venture capital bank,” he said.
“The bank’s geographic concentration was not as big as you might think.
“SVB had offices in Europe, Israel, Hong Kong and China along with operations in Chicago and New York and other US cities.
“The venture capital sector is also very diversified because it invests in many industries - financial services, life sciences, healthcare, software and others.”
Lopez is adamant that investment support for startups is not likely to wither following SVB’s collapse.
“I believe there will be a knee-jerk reaction for a few weeks,” he said.
“It will take a while for the market to settle and new players to step in.
“The bank made a balance sheet mistake but that to me is not a reflection on fintechs and the startup community.”