Silicon Valley Bank Collapse

By Ashwini Nathany

Posted on March 14, 2023

Silicon Valley Bank (SVB) was once considered to be the bank for startups, offering venture capital, lending, and banking services to emerging technology companies. However, in the late 2010s, the bank experienced significant difficulties, culminating in its collapse in 2023. In this article, we will examine the reasons behind the bank’s collapse and its impacts on the startup ecosystem.

Background:

Silicon Valley Bank was founded in 1983 by Bill Biggerstaff and is based in Santa Clara, California. The bank’s primary focus was on lending to early-stage technology companies, providing them with capital to help them grow. As Silicon Valley became the hub of technology innovation, the bank’s business grew rapidly, and it became the go-to bank for startups in the region. The bank quickly gained a reputation for understanding the unique needs of startup companies and providing them with financing and other financial services. Over the years, Silicon Valley Bank expanded its operations and became a major player in the technology industry, providing services to companies in the United States and around the world.

The bank also offered venture capital services, investing in early-stage startups that it believed had the potential for significant growth. Silicon Valley Bank’s reputation grew as it invested in successful companies like Twitter, Nest, and LinkedIn.

Current Situation:

On Thursday SVB tried to persuade clients from withdrawing their funds as they were running low on liquid cash. This did not sit well with the customers and the bank quickly was out of cash. The California Department of Financial Protection and Innovation shut down Silicon Valley Bank on Friday. The bank was taken over by the Regulators and the regulator appointed the Federal Deposit Insurance Corporation as the receiver. 

On Friday, Silicon Valley Bank, became the largest bank to fail since the 2008 financial crisis. The move put nearly $175 billion in customer deposits under the control of the Federal Deposit Insurance Corporation.

The F.D.I.C. created a new bank, the National Bank of Santa Clara. All the insured deposits were moved to the new entity and it was announced that the new bank would be operational by 13th March and the checks issued by the old bank would continue to clear.

Reasons For Collapse:

Firstly higher interest rates  by the Federal Reserve affected the bank adversely. In the 1980’s SVB was flush with deposits from highly valued startups. SVB kept a small fraction of this cash for operations and invested a major portion in long term Government Bonds. With the rise in inflation and increase in the interest rates to curb this inflation the return on the bonds was negative, SVB lost $1.8 billion.

Secondly there was a funding winter in the startup ecosystem. This was a difficult period for startups and they started withdrawing the deposits for payroll and operations. To ensure that the could pay their clients SVB sold its assets at a loss of close to $2 billion.

According to the bank’s financial statements, its loan portfolio had a delinquency rate of 5.6% in 2018, which was higher than the industry average. In addition, the bank had to set aside millions of dollars in loan loss reserves to cover potential losses. The combination of high delinquency rates and loan loss reserves put significant pressure on Silicon Valley Bank’s financials, leading to its collapse.

Impacts of the Collapse

Silicon Valley Bank’s troubles have caused concern among customers and investors, and many are worried that other banks could be at risk as well. While Silicon Valley Bank is much smaller than the largest banks like JPMorgan Chase, with its $209 billion in assets, there is always the possibility of bank runs if panic sets in.

On Friday, shares of First Republic Bank and Signature Bank fell more than 20 percent, as customers scrambled to get their money out. However, some of the biggest banks, including JPMorgan, Wells Fargo, and Citigroup, saw their shares rise slightly after a dip on Thursday.

For many young companies, the situation is even more dire. With their funds frozen at Silicon Valley Bank, some startups are turning to loans to keep their businesses afloat. Silicon Valley Bank provided banking services to nearly half of venture capital-backed tech and life-science companies, as well as over 2,500 venture capital firms, such as Lightspeed, Bain Capital, and Insight Partners.

Conclusion:

Some experts have noted that Silicon Valley Bank might have been able to manage its interest rate risks more effectively if certain parts of the Dodd-Frank financial-regulatory package, which was put in place after the 2008 crisis, had not been rolled back under the Trump administration. In particular, a bill signed by President Trump in 2018 reduced regulatory scrutiny for many regional banks, including Silicon Valley Bank.

Interestingly, Silicon Valley Bank’s CEO, Greg Becker, was a strong supporter of this change. It reduced the frequency with which banks with assets between $100 billion and $250 billion had to submit to stress tests by the Fed. However, Mr. Becker, who had previously served on the board of directors for the San Francisco Fed, was no longer on the board as of Friday, according to a spokesperson for the Fed.

The events of Friday have caused some to draw comparisons to the 2008 financial crisis. Although small bank failures are not uncommon, the last time a bank of this size failed was in 2008 when the F.D.I.C. took over Washington Mutual.

Typically, the F.D.I.C. prefers to take over failed banks on Fridays after business has closed for the weekend. However, in the first few hours of trading on Friday, the regulator announced the creation of a new bank, the National Bank of Santa Clara, to hold the deposits and assets of the failed Silicon Valley Bank.

The new bank is expected to be operating by Monday, and checks issued by the old bank will continue to clear. Depositors with up to $250,000 will be fully covered by F.D.I.C. insurance, but those with larger amounts may not get all of their money back. These customers will be given certificates for their uninsured funds and will be among the first to be paid back with recovered funds while the F.D.I.C. holds Silicon Valley Bank in receivership.

It’s worth noting that when IndyMac failed in 2008, a similar situation occurred. The F.D.I.C. held IndyMac in receivership until March 2009, and large depositors only received 50 percent of their uninsured funds back. Meanwhile, account holders at Washington Mutual were made whole when the bank was bought by JPMorgan Chase.

The UK branch of SVB has been bought by HSBC to ensure the investors do not suffer but the investors in the US bank may lose their deposits. Elon musk has shown interest but it is to be seen how the events unfold.

Silicon Valley Bank Collapse