SVB goes down, and the Fed and Treasury react. The latest on the financial crisis: What actually happened? What was done to stave off the crisis? What are the next steps and what’s further on the horizon? As always, our “no bs” views and analysis.

Navigation:

• Intro (01:34)
  
• Section 1: What happened?
  
• Section 2: What was done to stave off the crisis?
  
• Section 3: What are the next steps?
  
• Section 4: What’s on the horizon?
  
• Conclusion
  

Our co-hosts:

• Bertrand Schmitt, Entrepreneur in Residence at Red River West, co-founder of App Annie / Data.ai, business angel, advisor to startups and VC funds, @bschmitt
  
• Nuno Goncalves Pedro, Investor, Managing Partner, Founder at Chamaeleon, @ngpedro
  

Our show: Tech DECIPHERED brings you the Entrepreneur and Investor views on Big Tech, VC and Start-up news, opinion pieces and research. We decipher their meaning, and add inside knowledge and context. Being nerds, we also discuss the latest gadgets and pop culture news

Intro (01:34)

Bertrand

Welcome to Episode 40 of Tech DECIPHERED. An episode, of course, focused on what happened this past week with Silicon Valley Bank and the overall financial crisis around it. We are recording this as of Wednesday, March 15, Pacific Time. Between the recording and the release of this episode, it might take a few days, so things might have changed. Bear with us. What a week in Silicon Valley. That was pretty insane. I think we have a black swan type of crisis every year now happening.

Nuno

If it’s once a year, is it still a black swan?

Bertrand

Of course not. Sorry if my joke was not explicit enough.

Nuno

You’re being facetious, understood. Okay, clear.

Bertrand

I’m definitely being facetious about this. Definitely, in the past, I don’t know, three, four years have forced us to run businesses in a different way. We will try to do a short episode this time focusing on what happened, what was done to stave off this crisis, as well as what’s the next steps, what’s on the horizon.

Nuno

Let’s start with the obvious big picture thing. Rate increases by the Fed is one of the engines of all the issue around SVB. We’ll come back to what actually happened later on, but let’s go through fundamentals first. The Fed has been increasing interest rates dramatically for the last less than a year. It’s going to be a year, I think, this week, from starting at 0.25-0.5 range to now being at 4.5%-4.75% range, if I got that right, for the Fed rate in one year, less than a year, which is incredible. That has created, obviously, a situation where there’s a lot of strain on various financial products that banks, for example, may be over exposed to.

Nuno

But it all started, in all honesty, for a valid reason, which was really containing and reducing inflation. If we remember, inflation started around the one point something percent mark, so well below the 2% magical number, which we’re now questioning is 2% really the right number or not. But it went through the roof by 2021 into 2022 to 9%, and the Fed had to do something. They’ve been pushing it down. Obviously, I think the last number of inflation is around 6.0%, very close to 6.0%. Clearly, the interest rate increases have been working in really containing and reducing inflation, but this is the side effect.

Bertrand

Yes, it’s definitely a side effect. Why is it a side effect? It’s because when you increase rates, especially so fast as a bank, especially banks who have seen continuous increase in deposits, thanks to the monetary inflation over the past few years. If you have bought assets, long-term bonds at low rates, suddenly with the rate increase, the value of your bonds is decreasing.

Bertrand

For me, what’s also interesting in all of this, and we keep learning more and more in the coming few days, but if I look at regulators, it looks like as well, they were asleep at the wheel. I was reading that a very recent FDIC stress test was not including any chance of rate increase in 2022. That proof for me is that banks officials were not doing what they were supposed to do in terms of diversifying risk, preparing to different situations. But the regulators were absolutely of the same mind. Apparently we talk more into the specifics of SVB, but several banks that went bankrupt actually just got their auditing released and done and stamped by KPMG in the past few days. We’re talking about two weeks and everything was supposedly all right.

Nuno

Just to clarify, they went bankrupt or they went under this systemic approach, either at FDIC or the Janet Yellen announcement? Because formally, I don’t think they’re bankrupt.

Bertrand

FDIC took them over, but took SVB over Friday morning. Let’s not forget we had another bank, Silvergate. The day before all this maelstrom on Wednesday I believe last week, didn’t technically went bankrupt but was ceasing operation. We got another bank, Signature Bank, also that was taken over by the FDIC. I don’t know if technically it was a bankruptcy, but I’m pretty sure it is because ultimately it’s taken over by a new entity. Senior management was fired. Technically, you are not banking with the same entity.

Nuno

Yeah, you’re banking with a bridge bank now.

Bertrand

I guess it’s as close as you can be for bankruptcy for a bank. Let’s put it that way. Banks have a special system in place to manage them when it is believed that it’s not running well anymore. From what I’m reading about Signature Bank, there was a belief from officials, apparently, that they were not close enough to the action at this bank to know what’s really going on, and that started to spook the FDIC officials. This one might be an even more different situation where technically they might have been in a better shape, but they were not able to share numbers at a fast enough pace with the regulators that the regulators believed that they have to take them over.

Bertrand

We talk about regulators and auditors, potentially a slip at the wheel. Maybe another piece, Jerome Powell was testifying last week in front of Congress that the banking system was all right. We are talking about days before all of this happened, and not just these guys went bankrupt, but we’ll talk more about this, but that actually there was a significant change in regulation to stave off a bigger disaster.

Nuno

Yes. Obviously, there’s a couple of other important elements here that we should maybe also talk about, the low returns on deposits that were around, the ability for people to move capital around and put their money into other accounts that obviously were giving them a lot better returns at that point in time. There was already some movements in terms of deposits in certain banks, in particular in SVB.

Bertrand

But to insist on this one, I have been following for a few weeks. There was definitely a lot of noise on this specific topic that not just SVB, but every bank in the US, because they have been so used to provide depositors with 0% interest rates on their savings account, didn’t want to raise them when it should have been appropriate to raise them in order to match the treasury.

Bertrand

There is here a very clear greed on the part of the banks not to provide returns to their depositors, and in exchange, take a big risk that depositors are going to leave. If they are going to leave, you have to compensate by either cashing out your bonds or other assets as a bank or having to raise equity. They all took a big chance by not increasing savings rates that people would not leave even when they have the opportunity to have very safe risk-free higher return from treasuries.

Nuno

What we had effectively on Thursday was a bank run 42 billion in initiated transfers. I’m not sure if all of them were completed, but 42 billion in initiated transfers, which is a world record, I’m pretty sure.

Bertrand

It is.

Nuno

We’re talking and discussing a lot of things around the bank that were very specific around this bank. A high concentration in some of the deposits, 42 billion would have been around 25%, very close to 25% of all the deposits in the bank. It would actually be 20% of all assets of the bank. A bank that had high concentration on certain accounts. From what I was told, there were certainly very large accounts with the bank, which is if one of those accounts got the money out, that significant hole immediately. All of this is true. I would go back a little bit because I actually disagree with all this discussion that’s happening around, “Oh, no, it was FDIC’s fault.” Of course, it was in some ways the Fed’s fault on increase of interest rates.

Bertrand

That I cannot fault the Fed to increase rates. I mean, that’s their job. The rest of the institutions should know that they have to do something.

Nuno

But maybe they increased it too fast.

Bertrand

I think they started too slow. That’s the issue. That’s why they had to go too fast.

Nuno

Yeah, maybe they started too late, and that’s the case, I don’t know. Maybe it is that the FDIC stress tests weren’t updated to include all these things. There may have been some regulatory mishaps that wouldn’t have happened otherwise. There may have been some mishaps where the bank had some issue that came up.

Nuno

My ongoing theory, and I cannot say for a fact this is true, but I’ve now talked to enough people that seem to agree that this is likely what happened, was there were definitely some discussions with Moody’s in the bank around their debt rate and a potential to actually downgrade them on their debt rating.

Nuno

There was actually a very quick knee jerk reaction to sell assets that they had at a loss. There was actually a push to recapitalize the bank, and we now know that magical number to be 2.25 billion, because it got announced in a press release on Thursday morning. In that recapitalization, it is clear that they started talking to a number of actors in the market, including General Atlantic, which is mentioned in the press release as already having committed 500 million for that press release.

Nuno

It is very, very clear that they talked to other actors. I’ve been told they talked to a couple of very large substantial venture capital firms. There were some news that came up and popped up very early on Thursday about a few well-known VCs having told their portfolio companies to take the money out and their own accounts to take their money out.

Nuno

It is also clear that the CEO of a bank at that point in time jumped on a Zoom call, I believe, at 11:30 AM Pacific Time on Thursday to [inaudible 00:09:10] and to calm down the markets. In that conversation, he used the word panic. I’m probably paraphrasing. I’m not sure exactly that he said this, but he said something. The worst possible case scenario that could happen right now is panicking. I’m paraphrasing. I’m sure it’s not exactly what he said, but he did use the word, and the rest is history.

Nuno

I actually think what happened in this case… I’ve had a bunch of conversations with people that told me that, for example, the financial situation of SVB was actually very good. Obviously, they need to be capitalized and there’s sometimes liquidity issues potentially. But the reason why this failed was because of the bank run. It was not because the bank had a structural issue where they were going to die.

Nuno

The truth is, and I’ve had a bunch of discussions with a few other people that tell me there’s a lot of banks around the world that are in a much worse situation and nobody’s calling for, “Oh, they’re going to go bankrupt.” What happened here was a perfect storm of the worst possible communication by the leadership of a specific bank, SVB, and I’m going to call them out on this. I don’t know them personally. I may know one or two people, but I don’t know their former CEO personally, et cetera. I’m going to call them out.

Nuno

Poor communication, poor press release. They hadn’t closed the process yet of recapitalization. Maybe they should have waited and a bunch of knee jerk reactions and maybe talking to the wrong actors. When you talk to venture capital firms, you need to know this is the most connected community probably on earth, and they have portfolio companies, so they have to think not only of their own fiduciary duty to their own accounts, et cetera, but also the money that they’ve invested in others. That was, in my opinion, in very high likelihood, the match to this.

Nuno

Because if I look at my tableau de board, on Thursday morning, we were having our partner meeting. We normally like to just focus on the partner meeting, but my messages were popping left and right, WhatsApp messages, Signal, whatever, with different groups saying, “Are you guys hearing about SVB? You need to take your money out. You as a VC, you need to take your money out. You need to tell your portfolio companies to take your money out.” This was literally the morning.

Nuno

Clearly, there was a lot of communication happening. I’m not saying there were bad actors on the side of this bank run, but when this information starts getting propagated, it’s done. Because at that point in time, it’s game theory. What am I going to do? Am I going to be the last stupid person who just has money at SVB and I might not get it back? No, hell no. I’m going to take it out. If I can, I’ll take it out. I think that’s what actually happened. It was a piss poor communication, a bank that really didn’t need to go under FDIC or go under, a bank that actually just needed to get their act together.

Nuno

We’ve seen announcement, for example, First Republic Bank got kicked in the butt as well, immediately at opening on Monday. Immediately as well, they had this announcement saying, “We’ve recapitalized, we have this money, et cetera,” and it seems to be a flow. They’ve downgraded on one of their sides right now. But actually at the end of the day, they’re still around. There doesn’t seem to be a lot of noise around whether they’re going under or not.

Nuno

Clearly, I think their process was wrong. Their communication was piss poor, just to be very honest. Piss poor, it was crap. Then they may have talked to the wrong actors that are just the propagators of this information. What would they do with the information? They have to move on and be conservative. They have to move their capital outside and they have to tell their portfolio companies to move their money outside. That’s as simple as it is. This was the most classic of bank runs on the worst possible scenario. Highly networked bunch of actors that had capital there, high concentration of deposits, et cetera. It’s the perfect storm.

Bertrand

I certainly agree that the approach that they seemed to have had to reach out to PE firms, VC firms was the most crazy one as a banking actor to take because these guys talk and these guys have portfolio companies at scale.

Nuno

Why would you do that?

Bertrand

They should have gone to other big actors. You talk about First Republic, I believe they got this line of credit from JPM. But in some ways it was easier for them because it was after the facts and after the new rules. But I would still slightly disagree. This is a bank, and I’m not a banking expert, but I heard a few and they were all saying that the way that SVB didn’t hedge the interest risk was insane. Was textbook what you should never have ever been doing, ever as a bank. For me, that’s a pretty big one.

Bertrand

Basically, you go all in in the wrong direction, betting on the market without hedging your actions, and we were talking about, I believe it was $90 billion worth of bonds. It’s a bank that had no chief risk officer for the past 12 months. It’s the 16th bank in the US.

Bertrand

For me, there are a few elements that make me believe that, yes, definitely they did the wrong decision in terms of capitalizing, in terms of everything. But at the same time, to say they were structurally sound, I’m not so sure when your deposits are leaving by the day because you have better alternative in terms of treasures, or because your clients don’t get more financing but keep burning. At some point, you have to manage that process of building up the equity when you have made incredibly bad financial decisions running your bank. At some point, yes, maybe they could have stave off this disaster once or twice, but disaster was still coming. But yeah, it’s a bad situation.

Nuno

It’s very easy to go back and say, “Oh, they could have done this and done that.” They probably made a ridiculous amount of mistakes. I’m sure they made mistakes. As to be honest, I am pretty sure that today, on this Wednesday, March 15, there are a bunch of really big banks still making stupid mistakes. I’m sure about that.

Nuno

Pointing the finger on is I can’t be sure. I’m not part of SVB, I wasn’t there in the middle, I wasn’t a part of the discussions, et cetera. With a very high degree of probability, I don’t think that’s why they failed. I don’t think that’s why FDIC had to intervene. I don’t think that’s why the bank run started. It started because it started with hysteria. Hysteria comes from communication, again, to the wrong actors, wrong process, in the wrong way. And it’s life. It’s literally life. It’s just unfortunate. It’s just a bunch of people, to your point, that have access to online mobile banking with a lot of money.

Bertrand

In some ways, it was one of the most risky deposit or base you could get as a bank in terms of potential for bank run. That’s for sure. But at the same time, let’s not forget, we had two other banks, Silvergate and Signature Bank. What I was reading is that many other banks were at insane risk, and that’s why they did that bigger approach to solving the problem. Maybe we can go there. What was done to stave off this crisis?

Bertrand

On Sunday evening, was announced not a bailout, but shareholders and bond holders being wiped out. On the other end, depositors made fool, and that’s really the big part. What we should not forget because I’m seeing people complaining that it’s saving the rich or whatever, this is nonsense because if you have many banks that are going under and many more in the process of going under, if nothing is done, this is not just saving some people holding bank accounts at Silicon Valley Bank.

Bertrand

Again, shareholders and bond holders are not being saved. More important, people keep money at Silicon Valley Bank because you have to pay wages, you have to pay suppliers, you have to do basic bank operations, and the limits of the system at 250,000 are simply not enough to do some of this activity.

Bertrand

For me, raising a bigger question on the financial system itself. Why do we have this insurance limit? Why have they not increased actually over the years? Because I forgot when they were set up, but it’s been a while that they were at this level, and we all know that inflation has been big the past few years. Whatever was right years ago is probably not right today. It’s raising obviously question about why banks are playing with our money. Some will argue that the design of the banking system, yes, but you could argue the banking system could be organized very differently.

Bertrand

What else was done to stave off this crisis? A new process to make banks more solid in face of that current bond situation. Basically, bonds are going to be valued at par going forward in order to basically recognize a better position for the banks and also give them access to liquidity, valuing bonds at this par value, which is in some ways good and bad. It’s good because it’s saving the situation, saving the day. Bad because it makes no sense. This is a bad investment. It should be recognized as such. But as we have seen, if it’s recognized as such, the whole banking system is at risk and no one wants that.

Bertrand

Maybe one last piece of the puzzle, at least Silicon Valley Bank, UK branch, was acquired by HSBC in the UK, one of the biggest British bank. That’s a good thing because depositor were not only made whole, but operations are going forward in a perfect transition, removing any level of uncertainty like we have today in the US about where is SVB going ultimately.

Nuno

My opinion is the Fed was spot on. Treasury and Fed were spot on. They reacted at the right time. They stepped in. The formal time, I think, was Friday, but everyone is now saying that actually there’s a bunch of wires that were put forward after the wire cut off, which would have been 2:30 PM on Pacific Time for USD international and domestic wires on Thursday.

Nuno

There were a bunch of wires that were put forward that should have gone through first thing in the morning, because the FDIC only announced it later in the morning, that didn’t go through. I have the impression that actually FDIC on Friday was already in control of the bank, or at least there was no operations happening. I think that action was important.

Nuno

The announcement, obviously, portrayed by in this case, Janet Yellen, from treasury, on Sunday was essential to your point so that there wasn’t any contingent. To be very honest, the way I see this is not only it’s not a bailout as it’s really an advance. They will get and recoup whatever capital they need to deploy more upfront, because I do think actually the bank has enough assets to, over time, basically make its depositors.

Bertrand

On the long run, yes.

Nuno

It’s not very long. Maybe even if the FDIC went through the process, if I had to make a bet, I think depositors would get their money back. That’s been my view. I don’t know if it would take 90 days to 180 days to get all of that back.

Bertrand

If it’s 10-year bond, I’m not sure you’d make your money back in 90 days.

Nuno

But there’s ways of basically selling this in secondary, let’s say. It’s not out of the question that they would.

Bertrand

Yes, but at a discount.

Nuno

Yes, of course. Long story short, I see it then as an advance. I don’t see it as a bailout. To your point, shareholders and bond holders got stuck. There’s this notion in my mind that a lot of these players and actors that were in the market had invested in a bank that they thought were okay, and the stock just went to hell. I’m not sure all of them deserve…

Nuno

The people that put money in on Thursday itself because they were like, “There’s no way this is going to go further down,” that’s speculative. That’s life. I know people that lost, for example, a lot of money with Lemon because of that, because there’s no way this bank can fail. That’s you just being speculative and there’s high risk in that decision and then that operation. They lost their money, it’s life. They made a bet. It’s like going to a casino. You made a bet on red, the fuck, it was black. There’s nothing we can do about those guys. But I do think there’s some long-term stockholders, et cetera, that might have been kicked in the butt for no reason, they were bond holders.

Bertrand

I agree that some might have been misled, and that could be the question. That’s where law suits will go. Have they been misled by management? I don’t know. That would be a very interesting topic. Maybe we will ultimately discover that no, actually these guys have been misled, and yes, they ultimately are being wiped out, but it was technically not their fault.

Nuno

Yeah, correct. But anyway, it was not a bailout. I think we all agree on that. To your question, I believe the 250,000 was established magically enough in 2008.

Bertrand

Fourteen years of-

Nuno

As one would assume, it went up from 100,000.

Bertrand

Fifteen years of inflation.

Nuno

It went up from 100,000. It hadn’t been increased in 28 years when it was increased in 2008.

Bertrand

Interesting. Now it’s just 15 years.

Nuno

Now it’s just 15, not too bad.

Bertrand

But there is actually a lot of discussions of increasing this limit because why this amount? Anyway, in terms of next steps, there were a few questions. First, we know as of today, SVB is operating as a going concern. They are not trying to liquidate it. They are trying to find a bank to acquire it. Saying a bank because they seem to not want anything else than a bank acquiring SVB.

Bertrand

One issue here is that it looks like the biggest banks were potentially interested, but they were forbidden to participate and bid. I agree with you, the process was not too bad. The bigger disaster was staved off. But I don’t see a reason why in such situation you would not have let a big bank take over SVB so that there is even less disruption in the operation of this bank.

Nuno

I think there’s some rules around this definition of systemically important banks, the SIBs, which we now know all everything about. There’s tierages around it. From tier five, I don’t think there’s any tier five. There’s tier four, tier three, tier two, tier one. They have certain expectations in terms of their ratios, et cetera. Some of these banks, from what I’ve heard, are actually forbidden to buy. I heard something around Wells Fargo, I don’t know if that’s true or not, that they cannot further buy in the US for some degree of concentration issue or whatever. That might be related to that.

Nuno

I don’t think this was a decision post hoc because of what happened that they went back to these banks and say, “You cannot buy SVB.” I think there were already some limitations that I was told when the incident happened, so previously to the incident happening, that would actually impede some banks from doing this type of acquisition. It’s more likely that it’s a midsize bank or a regional bank that would buy them rather than a large bank. That is clear.

Nuno

I think the second thing, if we believe, obviously all the communication has been going out from the new CEO of the bank, the bridge bank, to be clear, as you mentioned before, it’s no longer SVB per se, it’s the Silicon Valley Bridge Bank.

Nuno

The CEO has come out and said there are really three options. There’s an option which is very unlikely of liquidation, and then there’s an option of having an acquirer come in. Many people say this week is the magical week. I don’t know if it’s true or not. There is an option in the middle, which is the option of actually Silicon Valley Bank continue operating as an independent bank.

Nuno

He’s come forward and said that. I don’t know, again, what that would look like. I guess they would need a new set of shareholders. How would that work? They were a public company, they would have to go private. I don’t actually understand how they would need to deal with it. But there seems to be an option where they would continue of their own accord with minority shareholders that maybe would help them recapitalize, et cetera.

Bertrand

Interesting. I didn’t know that this plan was really on the table. In terms of next steps for companies and investors, of course, you want to find another partner bank to replace or complement Silicon Valley Bank. I say complement because they might not disappear and they provide useful service. If they don’t disappear and keep providing useful service, there might be value to keep using them as a banking partner, especially that, as of today, SVB might be the safest bank in the US being fully insured 100% for existing and new deposit by the FDIC.

Nuno

Right now, this is a little bit of a whac-a-mole discussion. You definitely need to have other banking partners, there’s no doubt. If you’re a VC firm, a startup, a company that was banking with SVB, you’re like, “I need to have other options at the table.” We’ve been having this discussion internally quite a bit. I know the market is now thinking through should we have a dual structure where you have for all your entities at least two bank accounts? Because part of the issue when there’s a bank run like this is you need to transfer the money relatively quickly.

Bertrand

Indeed.

Nuno

You need to have another account. I heard some people now talking about triple layer where you have three banks. You have to think through the profile of risk of the three banks in any region that you’re in. You’re US, you have three banks for the US for all your entities. In my little brain, I’m like, maybe you go with two SIBs. One is more investment banky, the other one is more retail banky. Then you go with the regional one in the middle and you have three very different profiles of risk, and you’re like, “Man, if this all fails we die, the world is finished.”

Nuno

There are some guys who are like, “No, you should go like one SIB, one large domestic top 20, and one regional.” There is no right answers or wrong, but I do think a couple of things that are really important. One, you have to have your core account somewhere. A lot of these banks, unless you really have a ridiculous amount of money, don’t allow you to have several accounts at the same time. You have to be a little bit thoughtful about minimums and fees and stuff like that. You can’t just have a ton of accounts. Someone’s going to say, “Well, for you to have your money with us and bank with us, you need to have your core accounts with us.”

Bertrand

That’s a big issue actually, this one.

Nuno

It’s a big issue. It is actually one of the reasons why SVB existed in the first place. It’s because startups have a very high volatility on their bank accounts. They consume their cash, their money, and then they come back to market and they raise more and it’s lumpy and it’s difficult to serve them.

Nuno

For example, I had a journalist reaching out to me today asking, “Are your portfolio companies able to open bank accounts?” It’s a very valid question because they’re getting not only processes that are taking much longer, because there’s now a huge pipeline of startups applying for new bank accounts, but they actually have an added issue, which is their startups. They’re asking them, “Show me the things for the last three months. Show me who your investors are.” The DD has actually gotten different, more aggressive as well. That actually was one of the purposes that SVB served in the market, right?

Bertrand

Yeah, totally. I see a lot of reports that people are feeling that working with these social banks is actually not very easy, not very friendly, very time consuming. Some banks are actually telling them, “We don’t want your business. You are too small, you are too startupy.” To go back to one of your point, a lot of startups were having all their accounts at SVB because that’s one condition you have when you get a line of credit, is you have to bank with us and with us only. You can argue that’s one rational way to play the game for SVB.

Bertrand

But my point is that’s raising a big question because if you’re a startup and you plan to have line of credit and usually you want to have line of credit, there is non-dilutive access to capital, then it will become an issue and it will be a very big broad discussion. Do we agree to… In order to have a line of credit with a new bank, whatever it is, to have all our accounts in that bank, or how do we get around that? I think that would be a big question and might raise long-term questions around the efficiency of the startup system going forward.

Nuno

That’s the thing that everyone now, I think, is discussing, which is, are people going to come back to SVB, those that got the money out? Those that have the money in, as you said, it’s the safest money in the market right now, so you might as well just leave it there.

Bertrand

You can send it back.

Nuno

But the sending back piece, I think we will have a little by little of this reaffirmation. We’ve had a lot of venture capital firms, some well known entrepreneurs saying that they are sending money back into their SVB accounts. I think what we will stop having is…

Nuno

There were a bunch of VC firms and VC funds that had all their accounts with SVB for a variety of reasons; because they had a great relationship with them, because they had a bunch of products that they used for them anyway. I think that will stop existing. People will have at least a backup structure somewhere because we won’t go into this anymore. In some ways, we were forced to become pandemic experts over the last three years, and now we’re forced to become banking experts and look at the ratios and just to decide to open an account.

Bertrand

Yes. I feel bad because ultimately, if you look at the advice of financial analysts that were following SVB, it was buy, buy, buy advice, not even hold. We are saying that not only we need to become bank analysts, but we need to become very quickly better bank analysts than the guys who are supposedly bank analysts following big banks on Wall Street. This is not a small order.

Nuno

We’re regulators now. We’re mini regulators. It’s going to be a world of regulators.

Bertrand

We will have to think about, “Okay, but if this go bad, what will be the regulator reaction to this?”

Nuno

Not only experts in banking, but we need to be experts in game theory. Political and geopolitical stage.

Bertrand

Yes. How’s it backed by the Democrats? How we’ll react to Republicans on this?

Nuno

It’s incredible.

Bertrand

That will be a very interesting one. But for sure, me, what I see from that, we’ll have to be more careful about all of this. We’ll have to have backup system in place. We’ll have to have some money somewhere else stashed. But on top of this, I can see a slowdown going forward in activity financing for a few weeks until this is better understood.

Bertrand

I can see a drag on efficiency on business on the long run because all of that, what we are discussing, line of credits that are more difficult to get. There might be less competition, worse terms. I mean, Silicon Valley Bank was typically very friendly in terms of terms for line of credits. That’s not the case of many other banks. We’ll see a decrease in competition and no one will agree to stashing all their accounts with the same bank in exchange of a line of credit. What will be the trade off?

Bertrand

Another question for me is will we see regional banks slowly disappear? That’s the question. We have more than 4,000 banks in the US. In some ways, that sounds insane. Do we need so many banks? That’s for me, a real question. We know that some other countries are not structured like this. If you take Canada, it’s just a few big banks, a few regional banks, and that’s it. I think ultimately that we probably force startups to run even more lean. That shock that just happened, again, that black swan shock happening every year, what will be the next one? I think you will have to think differently and I guess your investors will push you to think differently going forward.

Nuno

There’s clearly an adaptation of the world in general, not just the US. Maybe switching gears a little bit to Europe, we’re now having these signals from Credit Suisse and the regulators stepping in saying, “We’ll backstop it,” et cetera. There is clearly a contagion going on. I mean, if we looked at Monday, everyone was getting kicked. Some were getting more kicked than others, but everyone was getting kicked in the US. Then there was an improvement on Tuesday, and now people and analysts are starting looking at the numbers again, and we might have that kicking into gear again, a bit of a bank run in some markets, et cetera, which is honestly not great.

Nuno

In some ways, this was a banking market that since 2008, for the most, has had very low interest rates. Obviously, in the last few years, in particular, and with COVID, it was even more ridiculous, very low interest rates.

Bertrand

Negative in Europe.

Nuno

Now it’s a banking industry that needs to get used to the fact that that’s not going to be the case for a while until certainly inflation is fully under control. How do they work in that market? I remember the very wise words of one of the most incredible and giant telecom industry guys that I’ve ever met, Mauro Sentinelli, who is credited with having invented prepaid. He always made fun of me because I said the first guys who implemented the word TMN in Portugal, but he invented it. He did win a lifetime achievement for that. How much has that changed the world?

Nuno

He always used to say, “The problem with some of these crises is you need to make sure that the people who are leading these things were there the crisis before.” Because if they’re not, pattern recognition, muscle memory, it’s not there. The reality is I’m not sure if all the leaders of the big banks globally right now have any pattern recognition around crisis. We always think about these CEOs, “Yeah, of course, they were there 10 years ago.” It’s like, yeah, but they were there 10 years ago or 15 years ago doing what? What were they doing? In which area of the bank were they at?

Nuno

Because people normally get kicked out after these dramas. If a bank goes to hell, as we’ve just seen with SVB, they get kicked out. Maybe the CEO of SVB was doing an amazing job until a certain point in time. Now he’s been kicked out. Where is he going? I don’t know.

Nuno

Again, for me, that’s one key concern of what’s happening right now. Do they know what they’re doing? Can they adapt to this new world of higher interest rates or very high interest rates in some cases? Can they figure out how to evolve their portfolio relatively quickly? Because they’ve been going at this for a while with a playbook that works really well, but now there’s actual dynamics in the market and there’s actual competition.

Nuno

To your point, you mentioned this earlier, Bertrand, you can offer deposits with higher rates. You can offer CDs with higher rates to your clients and compete in the market like that. The bank next door is offering at four, I offer 4.5, and we have again that competition. The competition is already happening. It’s happening in Europe, it’s happening in the US. There’s no doubt that the competition is happening.

Nuno

It’s not just the regulator and the interest rates and all this stuff, it’s other competitors and players in the market now have another lever they can play with for deposits and they’re using it to get market share to scale. Again, I don’t think we’ll be done on banking contagions for a while. I had a very wise friend of mine who yesterday told me, “If I were you, I’d put a lot of alerts on Google and stuff.” I’d go triple structure, as I just mentioned before, by geography, three banks in each place, whatever, and in a couple of months, maybe you can scale it down to two.

Bertrand

Yes, that sounds operationally painful but smart. Maybe, yes, the last piece of the puzzle, obviously, is how will the Fed and other regulators react in terms of rates? Are they going to say, “You know what? Given what’s happening, it’s too risky, we didn’t see it coming.”

Bertrand

Again, obviously, just a week ago, they were saying everything is fine. Does it mean they are going to say, “You know what, even what’s happened and what might still be happening, we are going to slow the increase of rates. Maybe we even pause the rate increase, but then we’ll get more inflation.”

Bertrand

Or will regulators believe that, “You know what? Now that the US system is safe or safer, thanks to new regulations, maybe we can keep increasing rates as we were planning to.” That would be a big question and I guess regulators across the world would be wondering and pondering this question. In some ways, SVB was probably a canary in the coal mine. The US system is probably another canary in the coal mine for the rest of the world.

Nuno

Indeed. With that note of canary in coal mines and hopefully by the time that you guys listen to this episode, all of this will have looked like, “Oh, my God. These guys were exaggerating so much. Nothing happened. We’re all great.” Hopefully, there wouldn’t have been the end of the world as we know it. But with that, we close our episode on Silicon Valley Bank, where we discussed what happened, what was done to stave off the crisis, next steps, and what’s on the horizon longer-term. Thank you, Bertrand.