The collapse of Silicon Valley Bank (SVB), the 16th largest bank in the US by assets, has put a spotlight on the startup ecosystem and venture capital apparatus. SVB specialized in meeting the credit needs of technology startups and venture capital firms, and had been a financial pillar of the startup world.[0]
The bank’s downfall can be traced to a combination of unfortunate events, including large deposits from one concentrated industry and an unusually high ratio of securities with unrealized losses relative to its total capital. This left SVB uniquely vulnerable to a “bank run” due to weak risk management practices.
The bank’s collapse was also emblematic of a startup ecosystem and venture-capital apparatus that are too unstable, too risky, and too unmoored from reality to be left in charge of something as important as the direction of our technological development.[1] Analysts had noted the bank’s catastrophic interest-rate problems in January, and Moody’s had been examining SVB for a downgrade.[2]
The root cause of SVB’s demise is the current challenging environment for startups and venture capital. Higher rates have exposed problems in bond portfolios, and put pressure on borrowers.[3] SVB catered specifically to tech companies, and word spread quickly, resulting in a bank run that the bank could not survive.[3]
The FDIC is now acting as a receiver for SVB and will liquidate the bank’s assets to pay back its customers, including depositors and creditors.[4] This action has been supported by the US Treasury Department, the Federal Reserve, and the FDIC to prevent bank runs across small and medium-sized banks, and to provide a liquidity backstop.
While no other bank appears to be in as severe stress as SVB, the deposit problem has not ended for its peers.[5] Large banks, however, are in far better financial shape than small ones, and have the ability to take some market share from those smaller banks.[6] This support from America’s largest banks reflects their confidence in First Republic and in banks of all sizes, and their commitment to helping banks serve their customers and communities.[7]
Overall, the collapse of Silicon Valley Bank has put the spotlight on the risks associated with the current startup ecosystem and venture-capital apparatus, and the need for more regulation and oversight within the industry.
0. “What to Know About Trump-Era Bank Deregulation and Bank Failures” FactCheck.org, 16 Mar. 2023, https://www.factcheck.org/2023/03/what-to-know-about-trump-era-bank-deregulation-and-bank-failures/
1. “Silicon Valley was already reeling before its favorite bank collapsed” Yahoo News, 16 Mar. 2023, https://news.yahoo.com/silicon-valley-was-already-reeling-before-its-favorite-bank-collapsed-204643748.html
2. “We Know Who’s to Blame for the Silicon Valley Bank Failure” The Atlantic, 16 Mar. 2023, https://www.theatlantic.com/ideas/archive/2023/03/svb-collapse-fed-regulation-financial-system-safety/673401
3. “How deep is the rot in America’s banking industry?” Yahoo Finance, 16 Mar. 2023, https://finance.yahoo.com/news/deep-rot-america-banking-industry-104028781.html
4. “Takeaways from America’s second-largest bank failure” CNN, 11 Mar. 2023, https://www.cnn.com/2023/03/11/business/svb-collapse-roundup-takeaways/index.html
5. “After SVB collapse, uninsured bank deposits are still a problem” Grid, 17 Mar. 2023, https://www.grid.news/story/economy/2023/03/17/after-silicon-valley-banks-collapse-uninsured-bank-deposits-are-still-a-problem
6. “March 2023 Newsletter: A Look at Bank Solvency” Lyn Alden, 13 Mar. 2023, https://www.lynalden.com/march-2023-newsletter/
7. “Reinforcing Confidence in First Republic Bank” news.firstrepublic.com, 16 Mar. 2023, https://news.firstrepublic.com/news-releases/news-release-details/reinforcing-confidence-first-republic-bank