Silicon Valley Calls the Help Desk on Volcker Rule

While Wall Street giants fight to get regulators to loosen the broad trading restrictions of the Volcker rule, a bank that sits in the heart of California's high-tech corridor has mounted its own aggressive and more focused lobbying effort.

Silicon Valley Bank is warning that the Volcker rule could hit the venture capital community it serves and deal a blow to startup companies critical to innovation and job creation.

"People can quibble about what's the right amount of capital flowing into startups but we would say let investors decide that, and policies shouldn't artificially get in the way," said Mary Dent, SVB's general counsel.

The bank, founded in 1983, focuses on the venture capital community and provides it with an array of services such as connecting firms with investors and serving as a commercial bank to startups and funds.

In a nod to the area's other high profile industry, SVB has a division that caters to winemakers.

The issue is whether regulators should interpret the Volcker rule to mean that a ban on banks investing their own money, beyond a small amount, in private equity funds should include investments in venture capital efforts.

The Santa Clara-based bank and groups like the National Venture Capital Association want regulators to explicitly exempt venture capital investing from the ban. They contend not doing so could deprive the industry of needed investments from banks at a time when funding is already hard to come by because of the sluggish economy.

The 2010 Dodd-Frank financial oversight law included the Volcker rule, which generally aims to restrict banks' risk-taking. Regulators are collecting comments on a proposed rule released in October.

Its main thrust is to prevent banks that receive government backstops like deposit insurance from making risky trades with their own funds in securities, derivatives and other financial products.

It was named for former Fed Chairman Paul Volcker, who championed the measure.

In their proposal, the agencies do not take a position and instead asked for feedback on how venture capital funds should be treated. A final rule is due in July.

So far the bank and its allies have been successful in getting some lawmakers from both parties to pressure regulators and one VC firm to share its tale of woe.

"Venture capital investing is not the highly risky behaviour that the Volcker rule is intended to curtail," Congresswoman Zoe Lofgren, a Democrat who represents the Silicon Valley area, argued in a Dec. 23 letter to U.S. regulators, including the Federal Reserve and the Securities and Exchange Commission.

Two other California Democrats, Michael Honda and Anna Eshoo, who represent parts of Silicon Valley, have also written regulators to express concern, and so has Arizona Republican David Schweikert.

Silicon Valley Bank announced earlier this month it has opened a new information and operations center in Arizona.

The bank and venture capital groups are portraying the possible impact on venture capital as an unintended consequence of the Volcker rule, which is mostly aimed at large banks active in trading markets like Goldman Sachs and Morgan Stanley .

But supporters of the crackdown have been skeptical of any attempt to permit exceptions to fund investments arguing it opens the door to banks putting too much of their capital on the line, especially if a fund runs into trouble.

One Volcker rule supporter, who declined to be named while regulators are still working on a final version, said other investors would likely step in to fill whatever hole in venture capital funding is left by banks due to Volcker.

"I think that's the more likely outcome," the person said.

KNOCK-ON EFFECT

Volcker rule supporters argue that banks that rely on government backstops should not be taking risks that could put taxpayers on the hook if those bets go south.

Its impact on venture capital funding has not been much of a concern for the largest U.S. banks who are focused on its limits on proprietary trading and hedge fund investments.

For instance, Bank of America spokesman Jerry Dubrowski said "we have largely exited VC funds as part of our continued focus on core businesses."

Silicon Valley Bank is unique in the industry, according to analysts, because of its almost singular focus on the venture capital community.

Its website boasts that half of all U.S. venture capital-backed companies do their banking with SVB and that two-thirds of venture capital firms bank with them.

The bank, which has about $19 billion in total assets, does some investing with its own money in VC funds.

Dent said this investing is an important but not a big part of their business and being blocked from doing so under Volcker would not be a significant blow to the bank's bottom line.

Jason O'Donnell, an analyst with Boenning & Scattergood who follows the bank, agreed and said the bank makes its profits through the fees it charges customers and the banking business it does with venture capital firms.

SVB's Dent said the bank's broader concern is any damage that could be done to venture capital firms and startups.

Anything that could ding the venture capital community would hit SVB's business model.

Exact numbers on how much banks invest in venture capital funds is hard to come by, but industry officials acknowledge it is less than 10 percent of the total put into these firms.

For its part, SVB, relying on research from data firm Preqin, estimates these funds receive about 7 percent of their funding from banks, which amounts to about $1 billion to $2 billion a year.

At least one venture capital firm has written regulators to express concern and surprise at the Volcker rule's impact on their business.

San Francisco-based Physic Ventures wrote the Federal Deposit Insurance Corp in October that an "international bank" withdrew a commitment to provide the fund with $25 million after its lawyers had concerns about the investment under the Volcker rule.

The firm called this amount "a significant portion of our next fund."

Physic says it "exists to generate wealth by investing in companies that create value through innovative solutions for disease, health and sustainability."

Among the companies it invests in is Chromatin Inc, a biotech company that focuses on renewable energy and "improving agricultural productivity."

"It is accurate to say that the investing we do is clearly in our nation's interest," William Rosenzweig, Physic's managing director, said in the letter. (Reporting By Dave Clarke in Washington; Additional reporting by Rick Rothacker in Charlotte, N.C.; Editing by Tim Dobbyn)