In the fall of 2015, when Silicon Valley Bank acquired Dan Kimerling's application programming interface solutions company, Standard Treasury, Kimerling also became part of the Santa Clara, California-based bank in a new role overseeing API banking, open platform and global research.
Kimerling's former company, which was named
In mid-March Silicon Valley Bank, which had been struggling with rising interest rates, failed after experiencing a bank run. The collapse set off
In a recent interview with American Banker, Kimerling shared his thoughts about what led to the collapse of Silicon Valley Bank in March and how the failure could affect the banking industry.
Here is an edited version of the conversation:
What is your take on what happened to Silicon Valley Bank in March?
There was a massive asset-liability mismatch, which led to them finding themselves in a dramatically undercapitalized position, which caused a bank run. I'm dramatically simplifying the situation, but that's my view of it. … I think there is a view that Silicon Valley Bank's downfall was a byproduct of working with these kinds of unusual and esoteric businesses, and I just don't think that is accurate. What made Silicon Valley Bank special is that it worked with weird companies and it was the financier of weird companies, but that's not what got it into trouble. … You can build an extremely effective, very lucrative business banking the innovation economy, and you can do that safely. I think there is this concern that the downfall of Silicon Valley Bank will cause a chilling effect on the innovation economy, and I'm hopeful that's not the case.
What makes you hopeful?
I think part of it is … prior to the downfall of Silicon Valley Bank, it and to a much lesser degree First Republic [Bank] constituted the vast, vast majority of venture debt in the United States, and so there was … a concentration risk. What we've seen in the last several weeks and months, certainly since early March, is that many of the best teams and individuals from Silicon Valley Bank have left and gone to other financial institutions, and you've read about things like that Stifel has hired a bunch of people, and HSBC and MUFG [have done the same], and that's very interesting to me in a sense that I hope one byproduct of this — and why I'm cautiously optimistic that it won't cause a chilling effect — is because there will actually be many more financial institutions doing this kind of work.
So it spreads the work out a bit?
Exactly. As human capital becomes less concentrated, there's an opportunity for this to become net-net beneficial to the rest of the industry. Not to say it won't be chaotic in the interim as things settle down … but I'm cautiously optimistic that once people find new homes and they find stable environments that want to go after these opportunities, I think it could lead to being ultimately beneficial for the industry.
What does it mean for banks that pick up these teams?
When Silicon Valley Bank was facing trouble, it was clear that other institutions were eyeing that line of business. … So I think what will happen is the acceleration of that work [because] they will be able to hire teams of people who have contacts and [that will] accelerate this kind of work. It was an extremely juicy business for Silicon Valley Bank, and other banks were certainly eyeing just how juicy it was.
What other impacts do you expect from the bank's failure?
Regulators in the U.S. distinguish between core deposits and noncore deposits, and there's long been a view that core deposits are cooler and therefore more stable in times of crisis. That was probably true in a world where to move funds one would have to go to a bank branch … but what we're starting to see is the first set of bank runs in the 21st century where you don't have to go to a bank to move your money. So there's probably going to have to be dialogue as an industry where we really test those assumptions for a new era. I don't have a fully baked thought there, but it's very clear to me that our model, which says that core deposits are cooler and more stable in a crisis, does not reflect the fact that people can open up their apps and move money digitally 24/7, 365 days a year.
Do you think the crisis will accelerate industry consolidation?
There's something like 4,100 commercial banks today, and there's a real question around whether that's an appropriate number. I don't think anybody says there are too few banks, but I think there continues to be a question of, are there too many?
What do you think?
There are too many banks that are subscale and don't add a lot of unique value, but there are too few banks in the sense that too many banks have become homogeneous. What we really need are financial institutions that are really differentiated in the kinds of customers they service and the kinds of communities they help and support. So I think we have too many and too few. I think [a concern], which I somewhat share, is that what will happen after this is that there will be far fewer banks and they'll all be really freaking boring, and they'll be run from large cities on the coasts and they won't actually reflect the needs of a very heterogeneous population.
So you think the industry needs more, not fewer, banks serving a niche set of customers?
I think there's going to have to be some give-and-take on that question. …It seems like there's some tension between the happiness of customers and anxiety around being vertically concentrated in one sector, so that's an interesting question.
