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Silicon Valley Bank’s focus on the venture capital industry was its downfall, Tim Melvin, a regional bank trader, said on “Benzinga Live” Friday.
Silicon Valley Bank has been closed by the California Department of Financial Protection and Innovation and the Federal Deposit Insurance Corporation (FDIC) has been appointed as the bank’s receiver.
SVB’s parent company, SVB Financial Group SIVB, failed to raise enough cash to sustain operations, and the bank was closed by the California Department of Financial Protection Friday and taken over by the Federal Deposit Insurance Corp.
The companies most affected by SVB’s collapse are venture capital-funded companies, especially in the tech startup space, Melvin said.
Read More: Check Out Tim Melvin On Marketfy
Melvin On What Happens Now: Early stage venture capital funding has dried up for the affected companies, and if they had money in SVB, they’re eligible to receive $250,000 under FDIC rules. Those funds could come as early as Monday, he said.
The FDIC will manage the bank’s assets, securities and loans to recover as much as possible for depositors, who Melvin said will come first, while shareholders, bondholders and preferential investors are still up in the air.
The regional bank expert said expects that depositors will get all or most of their money back, although it will take some time.
In his view, SVB should have halted deposits for a few days to calm the run on the bank instead of letting it turn into total failure, adding that the bank put too much money into its securities portfolio.
Other regional banks like Western Alliance Bancorporation WAL and PacWest Bancorp PACW, whose shares have dropped significantly, may not suffer the same fate as SVB, as they do not rely heavily on venture capital relationships, Melvin said.
Melvin said that unlike SVB, which serviced early stage venture funds, Western and PacWest mostly cater to late-stage funds, so while there could be a temptation to bail out a fund if necessary, it would not represent the bulk of deposits at either of the banks.
Melvin said he considers the SVB issue an interesting situation that we will be studying for a long time due to how quickly it occurred — and the fact that it probably did not have to happen.
The market was the root of the problem, in Melvin’s view, as it marked everything on a quarterly basis, which led to freezing withdrawals and a flood of deposit requests the bank could not handle.
Fear can lead to fear, he told Benzinga. The deposit demand from venture capital and crypto should not be replicated across other industries around the country, but a bank run cannot be completely ruled out, Melvin said.
Melvin’s 5 Bank Trade Ideas: Melvin named five regional banks that are currently trading under book value that could present themselves as opportunities for investors in the near future:
- HomeStreet Inc HMST
- TFS Financial Corporation TFSL
- LCNB Corp. LCNB
- New York Community Bancorp, Inc. NYCB
- Horizon Bancorp Inc HBNC
Watch the full interview here:
Read next: Sunrun Down Over 10% On Silicon Valley Bank Exposure: What Other Companies Are Exposed?
Photo via Shutterstock.
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Image and article originally from www.benzinga.com. Read the original article here.