The second-largest financial failure in United States history occurred last week when Silicon Valley Bank(SVB) collapsed after a series of bank runs drove a dagger through the heart of an already bleeding institution. What Happened?
Earlier in the week, SVB reported massive losses and that it would begin a selloff to stabilize its finances. On Wednesday, SVB – who services a majority of the tech startups in the United States – announced it had sold $21 Billion in securities at a $1.8 Billion loss. On Thursday, SVB Stocks dropped 60% after announcing a plan to sell another $2 Billion in capital. Stocks dove another 60% on Friday morning shortly before being halted.
Having failed numerous efforts to raise the necessary operating capital coupled with consumer panic, SVB took the hit of a $42 Billion bank run in one day; Silicon Valley Bank was dead. The FDIC stormed the gates on Friday with an attempt to repay depositors up to $250,000 by Monday, March 13. This brought a glimmer of hope to small-time depositors, but sadly companies like Roku might not be so fortunate as they had $487 Million of their cash reserves stored in SVB accounts.
Banks all over the nation are feeling the impact as investors and consumers are unsure of the future. Was this the beginning of a larger chain of events?
We reached out to one of our commercial real estate developers for their take on the situation:
“SVB was a huge top 20 bank but I believe the US baking system is still stable and a safer place than many alternatives. Every financial institution, both debt and equity, carry a degree of risk. It seems SVB was heavily weighted on tech companies, crypto, etc.
We are in a very interesting time. No one knows where the fed will land on interest rates but am hopeful we will, within 5 years, settle out around 6%. If we continue pressing into the 10% interest territory it may get ugly.
The last few years many people locked in 3-4% loans for 3 year periods. When those interest rates expire owners will be faced with debt payments that are double. Example: $5M 20 yr amortization loan at 3.25% interest produces a $28,359 monthly payment. If that loan rate expires in 2-5 years at 8%, the payment is $41,822. Not only are debt payments rising but we are facing inflation of expenses including labor, electric, property taxes, and more. If both debt and expenses continue to rise while renters cannot pay higher prices, highly leveraged properties may default.
Cash flow of properties will likely be an issue in the coming years. The good news is once we get through this time, the inflation will likely inflate property values when interest rates/markets settle.”
“We realized the need to distance ourselves from bank financing a few years ago.” Said Brian Sullivan, Founder and President of Precision Global Corporation. “We started raising more capital upfront as equity for our investors and less in the form of high-interest commercial loans.” PGC recently did a financial analysis of its portfolio, swiftly approaching $300 Million, to find only 25% utilizing bank financing; the other 75% is simply corporate and investor capital.
The collapse of SVB will likely have long-term ramifications for society, especially in the fields of finance and technology. People across the globe are anxiously awaiting what the future holds as it will likely be a great shake-up for banking, but with greater competition and advancement in technology over time; It could actually work out rather positively in the long run. Borrowers may find smaller, more nimble banks catering to their loan requests, resulting in lower interest rates and less documentation. On the investing side, crowdfunding might take off as more investors are willing to pool their money to sidestep banks and exorbitant rates, altogether.
The SVB collapse has certainly been a wake-up call for many investors and borrowers alike, but there may be hope yet. Companies like Precision Global have already been crowdfunding for years allowing investors to pool their money together for bigger projects, so this could become even more widespread going forward. As crowdfunding becomes more popular, it’s possible that we could see better loan rates for borrowers in the future. It remains to be seen what the consequences of this event will ultimately bring about – only time can tell!
