Is Silicon Valley Bank’s failure an omen for California?

BY DAN WALTERS, CalMatters

IN SUMMARY

The failure of Silicon Valley Bank struck California’s economically important high-tech industry while it was already facing difficult headwinds. The question is whether the bank’s failure is a harbinger of Silicon Valley’s decline.

It would be difficult to overstate Silicon Valley’s financial importance to California.

The San Jose-centered high technology industry exploded four decades ago as California’s manufacturing sector, which had boomed during and after World War II, was shrinking.

It became the state’s single most powerful economic engine, creating products and services that transformed California and had immense global impact. A few days ago, Gov. Gavin Newsom described it the “tent pole for our economy” and for once he wasn’t exaggerating.

As other economic sectors and other regions stagnated, Silicon Valley boomed. Without it, California could not have become the fifth – and very possibly the fourth – most powerful economy in the world.

Silicon Valley’s mega-corporations, such as Apple, Google and Twitter, sucked in immense amounts of money from every corner of the globe – not only making investors very rich, but creating countless jobs and pumping hundreds of billions of dollars into the state treasury as high income tax rates tapped into the new wealth.

However, there’s reason to wonder whether Silicon Valley has reached its peak.

In recent months, Silicon Valley’s corporations have been laying off workers and venture capital activity has slowed. A few weeks ago, a local industry organization, Joint Venture Silicon Valley, issued its annual report on the region’s economy, stressing a transition from a cauldron of start-up companies to dominance by a few giants.

“Tech is going through a painful period,” Russell Hancock, president of the organization said, adding hopefully that “there is no way to construe what is happening as a crisis” for the tech sector.

That was happening before Silicon Valley Bank, which was founded in 1983 as the region began to boom and rode the wave into becoming one of the nation’s largest financial houses, suddenly collapsed last week.

The bank experienced a run from depositors and could not raise enough cash to meet demand. State and federal financial regulators quickly stepped in, shuttered the bank and began seeking a buyer. Its failure sent shockwaves through Silicon Valley because of the bank’s prominent role in financing start-up companies and providing cash for payrolls and other expenses.

Relatively small depositors were covered by insurance, but hundreds of corporate customers had deposits over the $250,000 insurance limit and suddenly were unable to make withdrawals.

The immediate crisis was averted on Sunday when federal authorities arranged for Federal Reserve loans that would allow depositors to make full withdrawals. They also made money available to shore up other specialty banks that might be vulnerable to depositor runs.

Despite the emergency action, however, Silicon Valley Bank’s failure is a serious blow to the tech industry because of its pivotal role in financing innovation as a direct lender, as a financial service provider and as a midwife for attracting venture capital.

Federal authorities are looking for a buyer to absorb Silicon Valley Bank, quite possibly one of the nation’s larger banks. Even if a buyer emerges, however, the new owner would not have an intimate relationship to the region’s yeasty culture of aggressive innovation.

The bank’s owners prospered by deeply immersing themselves into that culture but that narrow focus made it vulnerable to outside economic factors. When the Federal Reserve System began raising interest rates to battle inflation, the bank’s portfolio of bonds lost value. When the bank was forced to sell those devalued bonds to meet withdrawal demands from depositors, it went into a death spiral.

The question is whether the bank’s failure is a harbinger of Silicon Valley’s decline.