The SVB Banking Crisis Step by Step | Jyri Engeström | Neuvottelija 182

Summary

Jyri Engeström of Yes VC came on eight days into the collapse of Silicon Valley Bank to describe it from the inside. The episode is a snapshot rather than a retrospective, and several judgements in it are forecasts made before the outcome was known.

This was not an ordinary bank run. Normally a bank makes risky investments, losses appear, and depositors leave. SVB’s balance sheet held near-riskless government securities and property-backed loans bought when rates were low, which had to be sold at a loss for liquidity. Wednesday’s disclosure of those losses and a small share issue was the spark. What made it exceptionally fast was the customer base: more than ninety per cent held deposits above the $250,000 insurance limit, because they were essentially all venture-backed startups. Engeström calls it probably the fastest bank run in history.

He does not protect himself in the telling. Asked about “Peter Thiel’s early-warning ring”, he says there was no ring and Thiel was not personally involved — it was finance people at Founders Fund. And he volunteers his own part: he advised his portfolio to pull out, and in hindsight calls that a mistake, since it was obvious that if everyone did it the bank would fall. As late as Wednesday he thought escalation to actual failure was impossible, and was wrong.

The trigger was payday. This is his explicit correction to the public account. The bank failed on Friday, the day before Monday’s US payroll. In America, failing to pay wages on time exposes an employer to being sued, so it is safer to make people redundant than to pay late. Companies therefore began drawing up redundancy plans and hunting emergency loans at the same time. Founders asked Engeström whether he had personal money available for their payroll. Miettinen’s conclusion: this was not a bailout of venture capital’s privileged, it was also wages and the survival of the companies.

What the bank meant. SVB had run for forty years and was practically the only bank that understood how to lend to startups, banking about half of all venture-backed companies and essentially every venture firm, and leading in venture debt. The alternatives do not integrate — Engeström still could not open a JPM account, and the big banks will not take venture investors at all. His systems run on Carta, which integrates with SVB, First Republic and Mercury. More than 600 venture firms signed a petition within a day asking that SVB continue.

Why it happened. Deposits had grown from about 50 billion to over 190 billion in two years and had to be placed somewhere, so they went into low-yield paper. When rates rose, venture investment fell, startups stopped receiving new money and began eating their deposits, and the deposit base turned down exactly as the portfolio went under water. “They had not prepared at all for that combined effect.” His real question is structural: how should a system account for the cyclicality of the startup sector, which will recur.

Deposit insurance is left unsolved. You should be able to trust the system’s liquidity while only being able to rely on $250,000 of it; someone must carry the excess. The American workaround is a sweep account distributing balances across banks nightly. Finland’s limit is €100,000, which covers no company’s payroll, and Engeström’s informal poll of Finnish startups found 68 per cent banking with Nordea and only 16 per cent using more than one bank — more concentrated than Silicon Valley was. An unlimited euro-area guarantee would put trillions of risk on taxpayers, for which, as Miettinen puts it, there is no political capacity.

The two disagree, civilly and without resolution, on what happens to SVB next: Miettinen expects it to be zombified into a piggy bank, Engeström reports from his own sources that it will continue and be sold. The episode closes on how a single bank failure reversed market rate expectations within hours, and on the AI year GPT-4 had just begun.

Watch

The recording lives on the Neuvottelija channel: SVB Pankkikriisi vaihe vaiheelta | Jyri Engeström | Neuvottelija 182. A Finnish edition of this episode is published at www.neuvottelija.fi.