Utah Leaders Reassure Tech Sector
This morning, in the immediate wake of the collapse of two banks, Silicon Valley Bank and Signature Bank, and fears of additional bank failures, the Silicon Slopes organization convened a diverse group of prominent Utah leaders representing several sectors (government, regulatory, investment, business) to discuss the fallout of the crisis—the second largest bank failure in US history.
Participants in the roundtable included Spencer Cox, Utah Governor; both senators Mitt Romney and Mike Lee; Scott Anderson, CEO of Zions Bank; Brad Wilson, Speaker of the Utah House of Representatives; Stuart Adams, President of Utah Senate; Randy Quarles, Former Vice Chair of the Federal Reserve; Darryle Rude, the commissioner of the Utah Department of Financial Institutions and several well-known leaders in Utah's VC and banking community. Most of them had spent hours in urgent all-hands-on-deck Zoom meetings and calls over the weekend. They prioritized making themselves available virtually to concerned tech leaders in Utah in a timely manner, both to quell concerns and to discuss local implications of the unfolding financial situation.
Clint Betts, Co-founder and CEO of Silicon Slopes, directed his own and audience questions to the group, starting with Scott Anderson, CEO of Zions Bank.
Anderson shared a statement about the status of the current situation:
"The actions over the weekend by the Treasury Department, with banking regulators, to protect the depositors in these institutions appear to have contained the risks that we were facing and the concerns that took hold among depositors at these banks. The Treasury announced that all deposits, insured and non-insured, would be available today. The Federal Reserve also announced yesterday that they had established a loan fund to support bank liquidity. These actions, calm the markets and relieve the worries of many small businesses about how they would be able to make payroll on Friday Friday, Secretary Yellen expressed full confidence in banking regulators to take appropriate action in response to the events that are happening. She noted that the banking system remains resilient. Bank regulators who have been monitoring the situation are confident that this failure is an idiosyncratic event and that there is no indication of systemic or liquidity issues."
a pointed out differences in Zion's conservative banking practices as compared to those of failed Silicon Valley Bank and Signature Banks.
"Zions differs from these banks in a number of very different ways. We've certainly grown over the past decade but nothing close to the aggressive growth rate at which Silicon Valley Bank and Signature Bank have grown. We have a business that is geographically diversified and is also diversified in terms of the types of clients we bank and the products we offer. Our strategy has been to focus on a large number of small and medium market businesses in a wide diversity of industries, as opposed to the narrow strategies followed by Silicon Valley Bank and Signature Bank. And our deposit base is very granular, consisting of some 1.4 million accounts, most of which are fully insured (by number), and nearly half of which (by account balances) are fully insured by the FDIC. We simply don't seek to build a bank with mammoth wholesale deposit accounts. To put a fine point on it, Silicon Valley Banks average Deposit Account Balance was an astonishing 22 times the size of the average deposit balance at Zions, with only 5% of their accounts fully insured."
He continued, "Our capital, earnings, credit quality, and liquidity remain in very solid shape as reflected in our recent 10-K filing with the Securities and Exchange Commission. We use the stress testing process and liquidity rules, followed by the largest, systemically-important, global banks to plan and prepare for industry stress."
Anderson called attention to a recent Bloomberg article emphasizing the importance of granularity in deposits, or having lowered balances per deposit, as a sign of funding stability "with Zions and Regent's banks leading peers on this measure."
"I want everyone to know that Zions is committed to the technology startup and venture capital space. We've been active in the venture capital and the SBIC space for nearly 30 years. We're supportive of Silicon Slopes, the Utah entrepreneurial challenge, and many other activities to foster innovation and starting new businesses. We've re-engineering our lending policies for early stage tech companies, making us more competitive. We started a dedicated tech lending group ten months ago headed by Sam Clark. Going forward we are committed to continue in this space and support great local companies. And lastly, we're onboarding former Silicon Valley Bank clients and are getting accounts set up quickly and at scale."
Governor Spencer Cox thanked the community of Utah leaders who sprang to action over the weekend to brainstorm potential, but unneeded state responses to what could have been a deeper crisis. The group that spent hours over the weekend, he said, communicated their concerns with the federal government, the FDIC and the Federal Reserve. He shared his perspective on government's role in business, which has been a staple of Utah governance for decades: "Our job is to support you, the entrepreneurs in our state who create the jobs and who keep our economy running," declared Governor Cox. "Far too often, we're part of the problem. But I hope this weekend we were part of the solution."
Recalling the intense weekend of government and industry people working closely together, Governor Cox mentioned, "it was impressive to me to see groups of people collaborating together in a very short amount of time working on potential solutions. If the Feds didn't step up, then the state would have and tried to find ways to to make sure that we're helping those who are struggling and especially the payroll piece. We knew that hundreds of businesses were impacted, and that means thousands and tens of thousands of employees would have been impacted. It could have been devastating to our state. So thanks to the entire ecosystem and everybody who worked so closely together—just know that we're here. We care and we're willing to spring into action when you need us."
Former Vice Chair of the Federal Reserve, Randy Quarles, characterized the Silicon Valley Bank and Signature Bank situation as "quite unusual," He calmly pointed out both banks were at risk because of the high concentration of their customers from a single industry, a point Scott Anderson emphasized as well, and the practice of having a very high level of very large uninsured deposits—90% of them being uninsured, very high for the banking industry, said Quarles, who suggested 50% would be a more expected percentage.
Quarles reminded the audience that in times of low interest rates, as we have experienced for the past decade and a half, banks often have few profitable lending opportunities. The failed banks in question had invested large amounts of cash in "normally perfectly safe" longer term treasury and mortgage backed securities. "Most banks make their money by taking credit risk, SVB made its money by taking interest rate risk. And obviously, that moved against them when interest rates started to rise" said Quarles, as near zero interest rates always do.
He said it wouldn't have mattered so long as the banks didn't have to sell those securities in the market;When they found they needed to sell those securities long before maturity and thereby recognize the losses, under intense liquidity pressure caused by masses of panicked customers suddenly withdrawing their deposits, the banks suffered a colossal liquidity crisis. Nearly $40 billion in deposits was withdrawn within about four hours, said Quarles, creating a situation that "no bank could withstand." He cites social media such as Twitter as an accelerant of a bank run "that we haven't seen in the modern era."
President of the Utah Senate, Stuart Adams, extolled the state's fiscally conservative operating practices, especially as regards borrowing funds for infrastructure development. As a new representative in the state legislature, he recalled, the state had previously turned to the bond market to finance the construction of new state buildings. That practice changed when the conservative lawmakers decided to reduce borrowing risks and instead use cash to pay for new infrastructure: "We wanted to be conservative, so we quit bonding for buildings," explains Rep. Adams. "We started paying cash for our buildings.
By taking a a flexible approach to infrastructure development by allocating state revenue to build buildings in strong economies while being able to shift gears in lean times to pay state salaries and other non-infrastructure expenses, the state created a more predictable and healthy environment for businesses. "Right now of the state's $28 billion budget, we have $1.5 billion [for infrastructure]. We're not borrowing to pay for it. We have ongoing revenue set aside to do infrastructure projects, which means that if the economy contracts a little bit, we can quit [those infrastructure projects.] and use that $1.5 billion to actually sustain our state services. I believe Utah is a safe haven for business for your businesses, not only because of our tax and regulatory policy, but because of the way we manage our budget. We're not a startup. We're in a great spot to do business."
Senator Mitt Romney commented on the flurry of weekend calls he and his staff received from concerned Utahns, "Everyone from Ryan Smith on one side to the owner of a business with a handful of employees on the other," he said called with concerns about the banking crisis playing out in California and New York. "They were all very, very concerned."
Senator Romney had been briefed Sunday night by the FDIC and the Federal Reserve, he said. "It's very clear that that both are anxious and willing to take whatever steps are necessary to make sure that people realize that their deposits in a federally regulated bank are not going to get lost. That they are fully covered." Senator Romney says the failure of SVB was caused both by inflation and the interest rates being raised to counter inflation. Echoing Quarles' commentary, Senator Romney said "as interest rates rose sharply SVB’s bond portfolio started to lose value." SVB customers started to withdraw deposits en masse, partly exacerbated by the influence of social media. SVB's cash reserves dwindled from the rapid withdrawal of deposits. SVB started selling the bonds at steep losses, long before their maturity rate, triggering even more customer withdrawals over two days to point that the FDIC had to step in and shut it down. Romney said that accounting rules enabling banks to sell bonds before their maturity dates, and a lack of warnings from regulators about this practice, may have led to the collapse of SVB and Signature.
Gavin Christensen, Managing Director of Kickstart, Utah's largest and most prolific seed investor, said, "entrepreneurs have faced some pretty unprecedented problems and challenges exogenous over the last few years, and this was just one more. As with thousands of entrepreneurial ventures, Kickstart itself banks with Silicon Valley Bank and was deeply concerned about "getting stuck" in a position of not being able to access deposits. Christensen mentioned there was potential for contagion sweeping across other banks, and he lamented the prospect of losing uninsured deposits in SVB. "Entrepreneurs were starting to think 'how much of my company can I save?" bracing for the potential for layoffs as a real possibility. "I'm proud of the role that the Utah played in this resolution...it was clear we were headed for hundreds of companies and thousands of jobs imperiled... it was going to be one to remember." Christiansen thanked the efforts of the leaders on the call to took action, and yet he cautioned, "we're not through it yet. There are challenges ahead, but boy, does it look so much better," referring to the federal government announcing plans to cover uninsured losses of the exposed customers of the two failed banks.
One question that came up more than once from the audience had to do with reports of banking malfeasance and mismanagement, including possible last-minute bonuses dispersed to bank executives shortly before the banks failed. To that point, Senator Romney assured the audience that any corruption would be discovered and addressed, "We don't know of any wrong-doing at this point but the FDIC will will have the capacity to to look into any transactions that front-ran the collapse of the bank, and that will include returning compensation to executives that withdrew their funds from accounts from the bank...those things will all have to be remediated."
Watch the full roundtable discussion, including additional insights from Utah's VC community not mentioned above: