Banking Law

I know thoughtful readers will find this hard to believe, but the financial reform legislation being reconciled by both houses of the US Congress might have some unintended consequences, and not all of those consequences will be beneficial. Yes, I, too, was stunned to learn that the all-wise, all-knowing seers in D.C. exemplified by Barney Frank and Christopher Dodd might--shall we say---"screw the pooch." Yet, it appears that such might be the case with a portion of the venture capital business.

A South Bay bank rated as one of the healthiest in the country could become a victim of the financial overhaul Congress is aiming at Wall Street and America?s biggest banks.

The parent company of Silicon Valley Bank is worried that the proposed, sweeping federal regulations could harm one of the things that makes it unique ? its roughly half a billion dollars in venture-related investments. It?s also worried the proposal will hurt venture-backed technology companies, SVB?s main banking clientele.

As part of the proposed legislation, the Senate?s version of the bill would bar banks or their holding companies from investing in hedge funds and private equity firms.

The section, known as the ?Volcker Rule,? does not explicitly cite venture capital firms as a banned area of investment. But according to Mary Dent, general counsel of SVB Financial Group, the Santa Clara bank?s parent company, the measure ?could be read to include venture funds.?

Let's hope they clear up that possible hitch in the giddy-up of venture capital funding prior to completion of the reconciliation process. Although only 4% of the bank's total assets are directly tied to venture capital funding that might be choked off by the reform bill, that represents over a half-billion dollars. Since venture capital funding nationwide for the first quarter of this year totaled only $3.6 billion, that hit to available funding for start-up enterprises could be painful. As if we needed further constraints on funding to small businesses.

And should anyone think that Silicon Valley Bank's venture capital funding is inherently risky and ought to be cut back in any event, the facts tell a different story.

Only one valley bank in the group Weiss [Ratings] rated was among the strongest in the nation ? Silicon Valley Bank. It was given a B+ grade and has $12.2 billion in assets.

Silicon Valley Bank ? which does little mortgage lending ? was listed by Weiss Group as being in near excellent shape.

By all means, let's take a strong bank that feeds job creators and hamstring it. I mean, Congress is doing that to the entire industrial banking business, which is also, overall, in strong financial shape and didn't participate in causing the current economic meltdown. So why not just cripple VC banks, as well?

You have to wonder how many more land mines are lurking in this massive piece of rank, big government-made sausage.