Silicon Valley Bank was famous for being the financial institution of choice for the tech industry. Then it became infamous for a bank run that ended with SVB in receivership. The bank was well-known for making bets of start-ups, but its history is connected to another high-risk endeavor – construction.
Most community banks, such as SVB as it was known, depend a lot on construction projects and commercial real estate for business. SVB differed from other community banks by its large focus on funding the tech industry. However, its failure and the ensuing problems at Signature Bank, First Republic Bank, and others caused concerns about the ability to fund commercial real estate projects.
SVB’s assets are currently in the process of being purchased by First Citizens Bank. Regulators and community bankers keep attempting to assure the public that there’s no overall threat to the community banking system.
“Depositors’ funds remain secure in community banks because these institutions are vested in their communities, promoting financial stability and prosperity on Main Street,” said Rebeca Romero Rainey, president, and CEO of the Independent Community Bankers of America.
“Community banks are vastly different from the nation’s largest and riskiest banks due to their time-tested business model, which is based on relationships and trust with their customers and communities, and they remain strong and resilient. As small businesses themselves, local community banks take pride in serving the unique needs of their customers and communities.”
In many ways, it was actually the construction business that launched SVB in the first place. One of the bank’s founders, Robert W. Medaris, taught for more than 30 years at Stanford University as a consulting professor of construction management. In an interview with the Computer History Museum (CHM), Medaris said that “what my class was for was really to help guys going to Bechtel and Fluor Daniel and construction firms like that.”
Medaris told the museum that his students came to him to seek advice getting funding for their projects. Those students included John Igoe, who is now running all constructions for Google, and Takeo Obayashi, chairman of one of Japan’s largest construction firms. At the same time these students were coming to Medaris in the early ‘80s, the federal government loosened the standards governing community banks.
Medaris and partners, Bill Biggerstaff and Robert Smith, saw an opportunity to start a bank that would serve the needs of tech entrepreneurs. However, as Medaris told the CHM, they needed backers. This is where the construction industry again played a part.
Medaris told the CMH that many of those backers came from a group of his poker buddies, including builder Burton Blackwell. Medaris said that “builders are natural gamblers.”
For many years, the investment in SVB paid off for everyone. Then came the rapidly rising interest rates of the past year, which caused depositors to seek higher yields than the bank could provide. This led to a modern-day bank run. The bank’s collapse caused a wide range of effects, including the delay of funding for many construction projects. SVB provided backing for several construction tech ventures and the bank promoted investments in “greentech” — the kind of innovations at the forefront of the HVAC industry’s push for increased sustainability.
Concerns linger about other community banks. Paul Ashworth, chief North America economist for Capital Economics, warns more could face “deposit flight.” This creates the risk, Ashworth said, of “a pull-back in lending, particularly by small banks, triggers a downturn in commercial real estate which, in a worst-case scenario, could develop into an adverse feedback loop.”
The construction industry and everyone else involved with it can now only watch and hope no further trouble arises.
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