This quarter’s Members-Only CEO Huddle was focused on the recent, almost overnight collapse of Silicon Valley Bank (SVB). The discussion was around what lessons could be learned, as well as future options and considerations for banking and financing. Here are some of the key insights and discussion points from the call.
Contributing Factors to the Collapse
- SVB’s business was heavily concentrated in a single sector – VC backed startups.
- They were a major destination for investor cash, with little offsetting demand for loans to diversify the deposits.
- They invested over $90B in Treasury Bonds & US Government agency mortgage-backed securities. To maximize returns, they bought securities with long-dated maturities.
- When interest rates started rising, bond prices fell rapidly, so SVB bond holdings values dropped over $21B.
- Word of the bank’s losses caused depositors to start withdrawing their funds. To meet that demand, SVB had to sell bonds at a loss, causing the rapid collapse ($42B on the first day of the run, with over $100B in requests for the second day).
- This was a classic bank run that no bank can sustain.
CEOs on the Impact to Their Businesses
Several of our CEO members shared the impact on their companies, ranging from high to low, but in all cases, the invitation was to look more closely at how to mitigate risk for the future.
- “We were an SVB client. They worked with us through M&As. They were a great partner and helped us to grow. When this happened, we didn’t have another bank. We had $8M tied up. We knew the government would cover it, but the challenge was finding another bank for our 6 different companies. Also, we had M&A loans lined up. All of this was worked out with SVB and now we are starting from scratch.
- “It didn’t impact us directly, but it did hit our private equity sponsor. We also asked the question, “Do any of our customers have exposure here?” Fortunately, it didn’t have a big impact on them either, but we still wanted to learn from it. We set up new policies to put excess cash in a safe place, so we could have access if we needed it. And all this accelerated a focus on risk mitigation in general. So we were thinking about risk everywhere and coming up with a plan.”
- “We had a single bank and now have opened more accounts. We were caught off guard because our payroll company banked with SVB, so they were banking our money there before distributing it to our employees. The lesson was you might not immediately realize the impact.”
- “Our business is family owned and operated and isn’t open to diversifying. They are very loyal when they have relationships. This didn’t have much of an impact on them and they don’t feel there is much risk or reason to consider going with other banks.”
11 Things for CEOs to Consider Moving Forward
- Banking relationships are important - You need to understand and be understood. What they are good at, not good at. What are their risk profiles?
- Diversification is key - It’s important to not have everything tied up in one place. If you aren’t convinced on diversifying, remember that nothing says another bank wouldn’t be susceptible. Ask yourself questions around the benefits of ONLY maintaining that relationship..
- Bigger banks may be better due to stability - While this may be true, the tradeoff is often cost, speed, service and support.
- Business continuity planning is a must - Now is the time to ask the “what ifs” and find a model that’s fast and flexible.
- Put aside cash to bridge in case things change in the future - Make sure that if something does happen, you have some space to react and make good decisions. No matter what, insure you have access to liquidity and capital. If you can’t pay the people, they aren’t going to show up and you don’t have a business. You need to have the ability to continue day-to-day operations if there is an interruption
- Build relationships with a bank that understands your business - The better they understand you, the better of a partner they will be. They should know the field you are in. In a credit crunch you want a bank or lender that understands how your business will operate through a challenging time.
- Even if you’ve been with your bank for a long time, you might be surprised how another bank can support you better - Rates are similar but there’s more to consider. Consider exploring some other options just so you know what else is out there.
- Make sure to interview potential banks and financial partners - You are getting to know them as much as they are getting to know you.There are always strings attached.
- Look at alternative financing options - Other options include private placement and firms that offer bank-like financing.
- Consider the benefits of large vs. small banks - Terms are similar, but with smaller banks, you are working with the decision makers so you get answers faster. If you have the patience to deal with larger bank bureaucracy, it may be worth it for the security.
- Explore the option of syndication - In this case, the risk is pushed over to two or three banks.
ABOUT THE CEO HUDDLE: Our quarterly CEO Huddles are member-only events for those in The Katahdin Group’s CEO Collective peer network. This is a forum for discussion and peer feedback on topics that are timely and important for those in the CEO seat. To learn more about the CEO Collective, contact us.