GUEST COLUMN: LBM lessons from the Silicon Valley Bank failure

Yesler's Matt Meyers details three lessons to be learned following the crash of the California-based bank.
a man looking at the camera
Matt Meyers, founder and CEO of Yesler.

Once in a while you have an unexpected, uninvited or even unwelcomed opportunity to learn. It’s why lumber mills track and share safety incidents - so others can learn without the risk associated with first-hand experience.

The sudden and spectacular failure of Silicon Valley Bank (SVB) and the pressure on the entire banking sector are this opportunity for everyone. Not just tech companies. 

It’s easy to tell yourself that the SVB crash was caused by crypto, risky start-ups, or the culture of Silicon Valley. Those narratives may be deemed contributors when the dust settles, but this could have easily been any bank for any lumber operator in the industry. In fact, if LBM operators share banking best practices and have favorite shared banks, you have increased your risk just like tech companies and venture capital firms did with SVB.

I’m not a banker. I’m in my 27th year in the lumber industry. You should seek the advice of lawyers and bankers for details on how these lessons apply to your situation. These are simply executable insights from my position with one foot in tech and the other in LBM as I watched CEOs, CFOs, Regulations, and bankers scramble in one frantic weekend.

Three lessons stand-out from SVB's collapse:

Lesson 1 - Your bank can fail, too
The fundamental problem was not tech. It was a completely avoidable asset to liability mismatch. Using long-term funds to boost yields above the cost of money worked, until it didn’t in a rising interest rate environment. Then, the run on deposits killed the bank. That’s the short version.  

There was plenty of evidence of risk in SVBs balance sheet and regulatory filings that is easy to see with hindsight. More importantly, going forward, there is evidence that other banks are at risk in the actions announced Sunday by the FDIC, Federal Reserve, and Treasury to prop up other banks. Most importantly, they created a new lending facility to backstop all other banks. In other words, your bank might have failed too, in the coming days, except that regulators created a liquidity solution to backstop your non-SVB bank. This problem is clearly larger than SVB, otherwise the weekend moves by government officials would not have been so swift and strong. Nor would markets have repriced bank stocks lower on Monday 3/13, after the backstop was in place. 

Lesson 2 -Diversify your banking
First, you can diversify banking relationships. When a bank like SVB fails, it fails fast. At the speed of wire transfers. Although many in LBM still prefer cash and checks, those are relics. New banking relationships cannot be created fast enough once failure starts. Know-your-customer obligations can slow new account creation. Two separate banking relationships and bank risk profiles, coupled with pre-established wire transfer relationships looks smart in hindsight. If you love your local commercial bank, keep it, and consider another relationship as run-prevention.

Second, diversity the types of accounts you have within the bank. Until SVB, FDIC insured up to $250k. We’ll see if this limit changes for the future. If you keep more than this amount in an uninsured account, you risk loss. Sweep extra funds regularly into a different type of account accessible in your bank that invests that money directly into other secure assets. SVB may have had a fundamental problem, but so did companies like Roku who kept nearly $500 million at risk. If you have millions, don’t keep it all in a deposit account that can vaporize in a failure.

Lesson 3 - Have a plan
Bank failure is a very obscure tail-risk, so I am not implying that you should have bank-fail drills like fire drills or safety meetings. But there are three key questions you can ask yourself. If the answer is “no”, then you might need to do some homework.

First, is there someone else in your company (other than CEO/President)  who can move money or make banking decisions without you? Are their admin rights adequate at your financial institution to act with urgency? It’s worth knowing and checking in case you are unavailable in a liquidity crisis.

Second, can you fund your entire payroll from an FDIC insured $250k? FDIC stepped in immediately and told depositors they would have their $250k by Monday 3/13. Whew, right? Not so fast. This still left a nasty problem for any company with a payroll >$250k. Not only would they miss payroll if the Feds didn’t act to insure funds beyond $250k, but in some states the company would be breaking the law by missing payroll. Further, in some states the officers and directors of those companies may have been subject to personal liability. The FDIC’s move to guarantee above $250k was critical to those companies, many of whom had to process payroll the Monday after closure to fund Wednesday’s paychecks.

Third, if you had to move money quickly from bank one to cover your payroll from bank two in a liquidity crisis, would you violate your covenants at bank one? While the bank was failing, CEOs and CFOs were stuck: Leave money in SVB and risk loss of deposits if the bank failed? Or pull money out and knowingly violate commercial banking covenants on lines of credit/loans and deal with the consequences if the bank survived or was acquired? Some executives didn’t know their covenants at crunch time so they didn’t know their risks.

It’s easy to look sideways at the other guy when their bank fails. It’s especially easy from a traditional industry like LBM when watching a hoodie-wearing triad of VC money, the bank of Silicon Valley, and tech startups. But this bank failure was an old-fashioned bank run triggered by old-fashioned problems. It could have happened at a bank full of LBM companies. One thing we know for sure is that the next failure won’t look the same. Learning lessons from others’ experiences, even if they wear hoodies, may be your best defense.

(Matt Meyers is the founder and CEO of Yesler, the Seattle, Washington-based digital building materials marketplace.)

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