Silicon Valley Bank, an iconic 40-year-old institution based in Santa Clara, California, that catered to nearly half of all U.S. tech startups backed by venture capital, collapsed on Friday after a bank run forced the Federal Deposit Insurance Corporation (FDIC) to take control of the institution.[0] It is the largest US bank to fail since the 2008 financial crisis.[1]
At the end of December 2021, Silicon Valley Bank held around $209 billion in total assets and was one of the 20 largest commercial banks in the US.[2] According to its website, the bank serviced 65 percent of “all existing start-ups and many of the most prominent venture capital firms.”[3]
SVB was particularly flexible about lending tech startups money even though they didn’t have free cash flow or much in the way of assets.[4] As a result, it had become an integral part of the financial infrastructure of the tech industry, especially startups.[1]
In order to make good on withdrawals, SVB had to sell part of its bond holdings at a steep loss of $1.8 billion, the bank said last week.[3] The announcement scared the bank’s customers, who became concerned about SVB’s stability, and consequently withdrew more money from the bank, an example of a bank run.[5]
The Biden administration took an unprecedented step, ensuring that all customers of the defunct Silicon Valley Bank would be able to access all of their funds.[6] The Federal Deposit Insurance Corporation (FDIC) usually provides up to $250,000 in coverage per account holder, per bank. However, a whopping 85% of funds held by SVB were not protected by the FDIC, meaning billions of dollars must now be paid for by the federal government.[7]
On Monday, the stock prices of other banks considered to possess similar risks to SVB significantly decreased, with First Republic Bank falling by more than 60% and Western Alliance Bancorp dropping nearly 50%.[5] Investors were afraid that other lenders, particularly those of a smaller or regional size, would experience a similar rise in withdrawals, resulting in difficulty to satisfy the redemptions.[5]
The narrative of the Silicon Valley Bank incident is simple and clear.[3] During the pandemic, startups and tech firms experienced significant gains, some of which were deposited at the Silicon Valley Bank.[8] The bank, flush with their cash, followed the standard protocol for banks and kept a portion of the money on reserve, while investing the rest into long-term Treasury bonds that offered good returns during times of low interest rates.[8]
0. “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
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. “My Trade Amid SVB’s Fall? An ‘Insurance Policy’ on BofA I Hope Doesn’t Pay Off” RealMoney, 12 Mar. 2023, https://realmoney.thestreet.com/investing/stocks/my-bank-trade-an-insurance-policy-on-bofa-i-hope-doesn-t-pay-off-16118056
3. “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
4. “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/
5. “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
6. “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/
7. “With Silicon Valley Bank depositors protected, let the bailout debate begin” Axios, 13 Mar. 2023, https://www.axios.com/2023/03/13/let-the-bailout-debate-begin-silicon-valley-bank-fdic
8. “There’s a deeper story to Silicon Valley Bank’s failure. What can we learn from it?” The Guardian, 13 Mar. 2023, https://www.theguardian.com/commentisfree/2023/mar/13/svb-collapse-2008-financial-crisis