On Friday, the Silicon Valley Bank abruptly failed in what is believed to be the second-largest bank failure in US history. For years, it had been a trusted financial partner of the tech industry with billions of deposits, only two dozen branches nationwide, and an incredibly targeted customer base of venture capitalists, startups, and tech firms.
At the start of this week, many SVB customers began withdrawing their funds – prompting panic among bank customers and resulting in a run on the institution. Unfortunately, SVB’s deposits were only insured up to $250,000.
Why It Happened?
SVB was the go-to lender of Silicon Valley, servicing tech companies and venture capitalists alike. They were also one of the world’s largest banking groups – but now they are no more.
Silicon Valley Bank collapsed due to the devaluing of billions of dollars’ worth of bonds due to rising interest rates set by the Federal Reserve. As a result, their value decreased, and it became impossible for them to repay their loans.
Many banks invest their funds in US government bonds, and since last year the Federal Reserve has been raising interest rates. This has caused those bonds to decrease in value, making them more costly and less attractive to investors.
Silicon Valley Bank relied on bonds to finance its lending to startups. However, when interest rates increased, those startups began pulling their funds away from SVB in droves.
SVB also had many deposits, mostly from clients and technology startups. These accounts have now been transferred to the Federal Reserve.
How It Happened?
On Friday, March 9th, Silicon Valley Bank declared bankruptcy and is now insolvent – marking the second-largest failure of a US bank after Washington Mutual’s 2008 debacle. This development threatens to fundamentally alter the venture capital industry.
The tech community was stunned to hear of Silicon Valley Bank’s insolvency, and many are worried about how their money may be affected. The bank had invested heavily in government securities which lost value as interest rates increased.
But the bank had been able to protect itself by holding onto customers’ deposits, which are usually secure. That meant its assets were less vulnerable to changes in interest rates.
Unfortunately, as the Fed began raising interest rates to combat inflation, the value of those investments fell even further. This proved problematic for Silicon Valley Bank since they had purchased many bonds using customers’ deposits initially.
As the bank’s stock fell, a rush of deposit outflows started. This, in turn, alarmed clients and caused a classic “bank run,” sending shares tumbling.
Runs are common in banks that have experienced financial difficulty, and they can have serious repercussions for both businesses and individuals. As more people tried to withdraw their money, it became more difficult for them to locate another source of funding.
The FDIC is responsible for ensuring depositors’ money and has the power to take over a bank that has failed. Unfortunately, this can be an extended process, sometimes taking up to a week before liquidating all assets of a failing institution.
What’s more, the FDIC is responsible for safeguarding the government’s deposit insurance fund from losses. So, if a bank becomes insolvent and significant portions of its deposits remain uninsured, then the government must pay out money to those depositors to make them whole.
Therefore, the federal government is taking steps to assist Silicon Valley Bank’s depositors. It strives to guarantee everyone’s deposits are secure and accessible, as well as seeking out a buyer for the bank so all uninsured money can be safeguarded.
What’s Next?
Though SVB’s failure is not a catastrophe, it serves as a reminder that banks must be more aware of their risks. Since 2008, regulators have been tightening regulations, especially for institutions with many uninsured deposits and unrealized losses, which may come under increased scrutiny.
As the Federal Reserve increases interest rates, the value of longer-term securities has diminished, making it more costly for banks to fund their loans. Last week, the FDIC warned that these factors are making it increasingly difficult for banks to make quarterly cash calls and meet their short-term liquidity needs.
These worries are compounded by Silicon Valley Bank’s unique customer base, with many of its clients being startups and venture-backed companies. If SVB cannot recover its customers’ funds, many firms could find themselves in financial difficulty and unable to pay employees’ or other bills.
The Federal government is trying to determine the best path forward for SVB’s customers. There are diverse options available, such as allowing the government to guarantee their deposits or paying them out in dividends.
In the end, a bailout for Silicon Valley Bank appears unlikely. However, government officials are exploring other options to ensure SVB customers receive compensation and their deposits restored promptly. Hopefully, regulators will find a way to make SVB customers whole and prevent further issues in the future.
What’s the Future?
The collapse of Silicon Valley Bank, long considered a vital partner for venture capital funds and tech startups, has raised concerns about the future of this industry. The bank had become one of the main financial backers in the US startup scene, investing in companies such as Sunrun, Built Robotics, and ocean drone firm Sail drone.
However, SVB’s dependence on technology startups also made it vulnerable to the boom-and-bust cycles of the startup world. This was especially true as economic tightening made lenders less risk averse.
All those who had their money at SVB will now receive an advance dividend and a certificate, but not all of it back. This may cause some disruptions to people’s paychecks in the short term; however, this should not have too much of an effect on long-term payroll patterns.
On Saturday, the State of California and the Federal Deposit Insurance Corporation (FDIC) took control of SVB Bank. A new entity called Deposit Insurance National Bank of Santa Clara was created to manage all insured deposits from SVB.
If you have money at SVB, the FDIC will cover up to $250,000. Payment should begin as soon as Monday if there is money remaining in your account; until then, be sure to store your cash elsewhere.
Though SVB is unlikely to be the first bank to fail, it will not be the last, either. Since 2008, increased banking regulations have helped banks build emergency reserves so they can weather a financial storm like this one. But even so, this serves as an ominous reminder for both traditional banking systems and tech businesses alike.