It’s the 2020s, and life is hard for a lot of people. Chief among the many factors that are causing strife in the day-to-day existence of mortal man is money – how to get it, what to use it on, and where to keep it safe. While the first two quandaries are up for heated debate, most people have settled on using banks to take care of the last one.
Given the importance of a bank’s reliability in today’s modern financial hellscape, people get pretty upset when the one that they’ve chosen to hold on to their hard-earned currency suddenly collapses, gets shuttered by financial regulators, prevents them access to their assets, and forces them into a nightmarish logistical panic.
It is therefore understandable that customers of Silicon Valley Bank (SVB) were quite upset this weekend when the bank did all of the above.
The California-based SVB was the belle of the ball within the international start-up community, providing a slew of young companies with account services, loans and credit lines. The bank was the 16th-largest in the US, with over $200 billion in assets as of 2022, and served hundreds of clients in the United States, Israel and around the world.
Since it went kaput, newsrooms, boardrooms and probably some office bathrooms have all been abuzz as everyone races to understand exactly what SVB’s failure means for the US and global economies – and a small subset of those people are curious about how it pertains to Israel, whose economy is driven by a hi-tech industry that has frequently relied on credit lines from the aforementioned bank and has deposited quite a bit of money into its coffers.
Many questions arise, but the first that needs to be addressed is simple.
How does a bank just ‘collapse’?
The primary trigger of SVB’s collapse was a massive run of customer withdrawals.
Recent interest rate hikes from the US Federal Reserve had a tremendous impact on SVB Financial Group’s holdings, resulting in a tremendous loss in their value.
On March 8, the bank announced that it had sold $21b. worth of its securities at a loss of around $1.8b., and that it was attempting to raise $2.25b. in order to meet the withdrawal and lending needs of its customers.
This resulted in a huge drop in SVB’s stock price and triggered panic among many investors, who pulled their deposits from the bank in order to preserve their assets. In a single day, the bank’s stock price further plummeted by 60% and incurred a loss of more than $80b. in bank shares.
Shortly thereafter, regulators seized SVB and its assets, taking control of the bank’s deposits.
SVB’s failure is considered the largest of any US bank since the 2008 financial crisis, and its collapse has sparked fears of another such widespread disaster occurring. With this panic in the air, regulators on Sunday shut down Signature Bank, a major lender in the cryptocurrency market, in the hope of keeping things under control.
Enter Joe, stage left
On Monday, US President Joe Biden made a statement to reassure citizens that the government was taking steps to prevent a chain reaction of bank collapses. He assured customers of SVB and Signature Bank that their deposits were safe, but warned that “investors in the banks will not be protected.”
“They knowingly took a risk, and when the risk didn’t pay off, the investors lose their money. That’s how capitalism works.”
Joe Biden
“They knowingly took a risk, and when the risk didn’t pay off, the investors lose their money. That’s how capitalism works,” Biden said, noting that customers’ deposits would be covered by the Federal Deposit Insurance Corporation’s Deposit Insurance Fund, which typically covers only $250,000 of depositors’ assets.
“The FDIC on Friday took control of SVB’s assets, and over the weekend Signature’s. All customers who had deposits in these banks can rest assured they will be protected, and they’ll have access to the money as of today,” Biden said.
According to top US bank regulators, any losses to the Deposit Insurance Fund are to be covered by a special assessment levied on federally insured banks, not taxpayers.
The threat posed to Israel
The US government is taking steps to ensure that the problem doesn’t spread beyond SVB and Signature Bank, but the collapse of the former has been enough to trigger concern throughout the Israeli hi-tech industry, due to SVB’s central role in the Israeli start-up ecosystem.
Ian Rostowsky, partner and co-head of Amit, Pollak, Matalon & Co.’s Hi-Tech and Venture Capital Department, elaborated on that role.
“Generally, funds from investors come in only twice a year. In the meantime, if a start-up has investments that they need to make, they typically add a credit line with a bank, and a lot of them did it with Silicon Valley Bank,” he said. “So instead of drawing down the money from investors, they drew down from the credit line until they made the semiannual drawdown from the investors to cover the credit.”
“Generally, funds from investors come in only twice a year. In the meantime, if a start-up has investments that they need to make, they typically add a credit line with a bank, and a lot of them did it with Silicon Valley Bank. So instead of drawing down the money from investors, they drew down from the credit line until they made the semiannual drawdown from the investors to cover the credit.”
Ian Rostowsky
For those start-ups, the president’s promise that depositors’ funds will be covered by the FDIC has come as a relief, but there will still be lasting consequences for the industry moving forward.
“Those credit lines will not be available anymore. The way it seems today, those companies and funds will not be able to make any additional drawdowns on their credit lines, and so they will have to find alternative routes to finance their operations as needed,” explained Rostowsky. “The problem is that they will need to repay any loans outstanding or any amount outstanding in order to refinance.”
Israeli banks swoop in to fill the void
If there was fear that the vacuum left by SVB’s disappearance in the Israeli market would be left unfilled, it was for naught. Local competitors such as Leumi’s and Hapoalim’s tech branches have already begun to position themselves as prospective providers to Israeli hi-tech companies looking for credit.
CEO of KMS Lighthouse, Sagi Eliyahu, pointed out that from the perspective of a local financier, SVB’s collapse is a golden opportunity.
“For Israeli banks, the case is positive,” he said, noting that Bank Leumi’s tech branch has already managed to bring $1b. to Israel in the wake of SVB’s collapse. “Israeli banks are considered to be safe, relatively, due to Israel’s small, narrow banking market. So for them, it’s great news.”
“Israeli banks are considered to be safe, relatively, due to Israel’s small, narrow banking market. So for them, it’s great news.”
Sagi Eliyahu
The influx of funds to local banks raises a question regarding recent efforts by Israeli hi-tech companies to remove their assets from the Israeli economy. Over the past few months, several companies have committed to pulling their funds from Israel in an act of protest and as protection against the economic damage expected to be caused by the government’s proposed judicial overhaul.
While the situation is giving those companies “a chance to think twice, and not act too hastily,” as Eliyahu put it, SVB’s crash will likely lead to Israeli companies putting their funds right back into other American banks – or at least Israeli banks’ US counterparts.
“Maybe it will be less dramatic, but I still believe that companies will continue to move money out to foreign banks. Maybe less than they used to, but I don’t think that the trend will stop if these laws continue to pass through the Knesset,” Rostowsky said.
Is the average Israeli in trouble?
Rostowsky stated his certainty that, as far as the average Israeli consumer is concerned, “there’s no disaster on a significant scale,” noting that pensions are safe, and ultimately the issue should regulate in short order.
Others, such as head of Dun & Bradstreet Israel’s tech department Sheila Zavaro Weiss, are less optimistic, to say the least.
“We’re apparently at the beginning of an economic tsunami, and the collapse of the bank is the first wave gracing the shores of the global economy. The consequences will be widespread, with layoffs and reductions in almost every aspect of the economy,” she said. “No one is safe when banks collapse due to sheer panic.”
So, does Israeli hi-tech stand a chance? Despite the darkness on the horizon, Zavaro Weiss still holds out hope for Israel’s prized economic engine.
“The tech ecosystem has proven agile in times of turmoil,” she said. “I hope and believe the tech market will overcome – but it will take a little time.”
At present, it looks as though the SVB crisis is likely to turn out all right for Israel in the medium to long run, as FDIC-covered deposits are reimbursed and alternative credit sources are found by start-ups looking to make their mark on the world while still affording dinner.
One may therefore be forgiven for allowing their mind to wander to other concerns, such as the Israeli government’s looming legal overhaul, which hundreds of economists, experts and executives have warned will tank the hi-tech sector and bring down the country’s economy with it. ■