Lessons from the Collapse of Silicon Valley Bank

Silicon Valley Bank, often referred to as the “financial partner of the innovation economy”, was a major player in the tech sector and had been since its founding in 1983.[0] It was the go-to bank for many venture capital firms, funded nearly half of all US venture-backed startups, and served as a hub for the tech industry.[1] Unfortunately, the bank recently became the largest US bank to fail since the Great Recession and the second largest in US history after Washington Mutual in 2008.[2]

What caused the collapse of Silicon Valley Bank (SVB)?[3] Low interest rates, easy money, and plentiful loans had been driving the tech sector up for years and SVB had been riding the wave of success.[4] The bank had taken on too much risk, however, by taking in deposits mainly from the tech sector.[5] When the pandemic caused a tech industry downturn, SVB’s depositors began to withdraw their money in a panic, leading to a bank run.[2] The bank attempted to recoup some losses by selling assets, but ended up selling $21 billion at a $1.8 billion loss.[6] On Friday, March 8th, the Federal Deposit Insurance Corporation (FDIC) took control of SVB.[5]

The FDIC helped to insure all depositors, but the vast majority of SVB’s customers had deposits well in excess of the FDIC’s $250,000 cap, leaving many of them in a bind. SVB was uniquely flexible about lending tech startups money, offering venture debt and lines of credit to those who may have been unable to qualify for conventional bank financing.[7] This focus on tech startups, as well as offering services to VCs and founders who weren’t US citizens, made the bank vulnerable to risk when the tech sector took a downturn.

The collapse of SVB has sparked concerns about the banking sector as a whole and other lenders, especially smaller regional ones, have seen their stock values plummet in response.[8] Moving forward, investors may be more wary of banks that are too heavily concentrated in tech, or in any one sector. To stave off a catastrophic run at another bank, the Federal Reserve has made funds available to other institutions to help shore up their cash reserves.[9]

The collapse of Silicon Valley Bank is a cautionary tale of the dangers of taking on too much risk.

0. “PR-16-2023 3/10/2023” FDIC, 12 Mar. 2023, https://www.fdic.gov/news/press-releases/2023/pr23016.html

1. “What is Silicon Valley Bank? The bank’s collapse, explained.” Vox.com, 12 Mar. 2023, https://www.vox.com/technology/23634433/silicon-valley-bank-collapse-silvergate-first-republic-fdic

2. “Signature Bank’s collapse could deal a blow to cryptocurrency industry” The Washington Post, 13 Mar. 2023, https://www.washingtonpost.com/technology/2023/03/13/signature-bank-collapse-crypto/

3. “The tech industry avoided an ‘extinction-level event,’ but it’s not unscathed” CNN, 13 Mar. 2023, https://www.cnn.com/2023/03/13/tech/tech-industry-relief-silicon-valley-bank/index.html

4. “Opinion | The Boys Who Cried ‘Woke!’” The New York Times, 14 Mar. 2023, https://www.nytimes.com/2023/03/14/opinion/silicon-valley-bank-republicans-woke.html

5. “The collapse of Silicon Valley Bank, explained visually” USA TODAY, 14 Mar. 2023, https://www.usatoday.com/story/graphics/2023/03/13/graphics-bank-collapse-silicon-valley/11466073002/

6. “Silicon Valley Bank’s failure, the government’s depositor rescue, and venture capitalists’ incredible tantrum.” Slate, 13 Mar. 2023, https://slate.com/technology/2023/03/silicon-valley-bank-rescue-venture-capital-calacanis-sacks-ackman-tantrum.html

7. “Despite rescue, Seattle startups and banks face SVB blowback” The Seattle Times, 14 Mar. 2023, https://www.seattletimes.com/business/despite-rescue-seattle-startups-and-banks-face-svb-blowback/

8. “After Silicon Valley Bank collapses, plenty of worries over what’s next” NPR, 14 Mar. 2023, https://www.npr.org/2023/03/14/1163135286/silicon-valley-bank-collapse-fallout-whats-next

9. “U.S. government steps in to shore up deposits at Silicon Valley Bank and another failed institution” CBS News, 13 Mar. 2023, https://www.cbsnews.com/news/silicon-valley-bank-deposits-guaranteed-signature-bank-federal-reserve-fdic/