The collapse of Silicon Valley Bank (SVB) isn’t good news for anyone.
Bank collapses portend wider threats to the economy – the Great Depression is one such example – particularly when they derive from an eroding capital base resulting from the Federal Reserve raising interest rates to battle inflation.
It is estimated that more than 50% of venture-backed companies used Santa Clara, California-headquartered SVB as their depository and financing institution.
Wealth management, currency hedges, stock placements, you name it: SVB was the go-to financial institution for the tech industry.
So SVB’s collapse is a big hurt for the tech start-up industry, a classic bank run.
The federal government’s stepping in and covering all deposits – not just those up to the $250,000 guaranteed limit – should help.
So, what is the effect of SVB’s demise on the cannabis industry?
Green disaster avoided
For once, the marijuana industry is not the primary victim of the banking world.
First, SVB was very tech-centric and did not overtly provide banking services to the cannabis industry, despite its proximity to ground zero of the U.S. marijuana space: Northern California.
Second, because marijuana is a Schedule 1 drug, regulated cannabis companies are restricted to state boundaries, meaning there is no geographic concentration for cannabis banking.
This lack of concentration makes any single bank failure less impactful on the cannabis industry as a whole.
SVB was involved in one out of two venture-backed tech companies in the United States.
The marijuana space, meanwhile, is a decentralized – but regulated – industry that already has to look near and far for services such as accounting, law and, yes, banking.
Of course, the safest, best-capitalized banking institutions are federally chartered national banks (think JPMorgan Chase, Citibank, Capital One), which are prohibited from banking the marijuana industry, at least until the SAFE Banking Act passes.
Where cannabis fits in
The compliant marijuana industry needs to go downstream to the “state-chartered” financial institutions to meet its banking needs as well as to “non-bank lenders” for real estate, equipment and working capital financings.
These banks and “nonbanks,” scattered throughout the United States, service industries other than cannabis and have heightened due diligence and reporting requirements.
Like everything marijuana, they are regulated beyond reason. But this might be a good thing in a risky banking environment.
Many of the banks that service cannabis companies are smaller, with smaller capital bases, and are subject to the same financial imbalance that SVB faced.
But SVB was a top-20 contender, and the “marijuana-friendly” banks are nowhere near the top.
When the dust settles
Any disruption to the economy – particularly when it involves banks – is disconcerting and potentially impactful to the cannabis industry.
The global economy, including the United States, has not readjusted to a post-coronavirus world. It is convalescing and is likely to take longer to fully recover than people expect.
Consumers are jittery, and even a hint of trouble sends people scattering (with their money, if they can) like cockroaches in a bright light.
But cannabis is a survivor. It can grow in the cracks and take over a field: It is weed.
There is no “command central” to take out like SVB. It’s a decentralized organ.
Should one of the “marijuana-friendly” banks have similar troubles, it would certainly be a bad thing. But the impact would be less catastrophic to the industry as a whole.
Also, there is no “VC” industry built up around cannabis, wielding vast sums of deposited investors’ money waiting to pounce on the next big thing.
Finally, marijuana is a cash-based business, so normal banking services, such as credit cards, aren’t standard for the industry.
SVB’s demise is likely to have some negative impacts on the cannabis industry, but it won’t set it on fire and burn it down. (Full Story)