The Collapse of Silicon Valley Bank: A Warning to Banks Everywhere
Silicon Valley Bank, the tech industry’s go-to lender, collapsed Friday after its warning of a cash crunch spooked investors and prompted a run on the bank. The California Department of Financial Protection and Innovation shuttered the bank and appointed the Federal Deposit Insurance Corporation (FDIC) as a receiver.
The cause of SVB’s downfall can be traced to disruption brought about by increased interest rates. With the unfavourable climate for IPOs and private fundraising causing startup clients to withdraw their deposits to keep their companies afloat, SVB experienced a lack of capital. The bank reported late Wednesday that it had been compelled to sell its accessible bonds at a $1.8 billion deficit.
Depositors at smaller banks, such as SVB, are only formally insured up to $250,000. Over that amount, as the FDIC announced on Friday when it shuttered SVB, depositors are treated like ordinary creditors. It is suggested that when a bank such as SVB collapses, major depositors may only obtain a fraction of their money after all other debtors have been paid.
The collapse is a harsh reminder of the risk posed by banking on one industry. SVB’s business model was heavily concentrated in venture capital and private equity, and when that sector took a hit, so did the bank. This also calls into question the practice of venture capitalists requiring portfolio companies to bank with SVB and offering them attractive terms on mortgages and wealth management services.
The FDIC has taken control of SVB and customers will have access to their insured deposits on Monday. The agency’s insurance only covers deposits up to $250,000, though, and many startups kept far more than that with the bank.
The SVB collapse is a warning to all banks, but especially smaller ones that have concentrated on a single industry. It is a reminder that even the most successful institutions can face catastrophic losses if they don’t diversify their portfolios and manage their risk.
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