You’ve probably seen the news and Twitter buzzing about Silicon Valley Bank and everything that’s happened over the last few days. As the 16th largest bank in the US and the largest bank by deposits in Silicon Valley, SVB operated both across the United States and internationally. Most notably, SVB was responsible for the funding of almost half of all venture-backed tech startups.
On March 10, 2023, SVB failed and went into history as the second-largest bank failure in U.S. history. So what exactly happened? Let’s break it down.
Silicon Valley Bank: a quick history
Founded in 1983, SVB was designed to meet the needs of startup entrepreneurs and learned how to operate within the startup ecosystem, growing with tech startups to eventually achieve 21 consecutive quarters of profitability. In 1990, it expanded to the east coast to meet the needs of the Boston/Cambridge tech sectors.
By 2015, the bank claimed to serve 65% of all US startups and had grown to offer syndicated loans and foreign currency management. And heading into the end of 2022, it had achieved quite a lot:
14% of its loans were mortgages to high-net-worth individuals.
24% of its loans were to technology and healthcare companies.
In February 2023, SVB was listed by Forbes as #20 on their “America’s Best Banks” list.
In March 2023, Moody’s Investors Service evaluated the bank’s loan portfolio as conservative and high-performing.
Overseas, the bank held $13.9 in deposits.
A Breakdown of March 2023
As tech gadgets and tools became more popular during the pandemic, startups put more and more of their money into SVB and, in turn, SVB invested those deposits, just like any bank. They invested billions of dollars in long-dated U.S. government bonds and mortgage-backed securities. And while these decisions seemed solid when they were made, the Federal Reserve’s actions to slow inflation rates last year raised interest rates and lowered the value of both SVB’s bonds and mortgage rates. Simultaneously, the tech sector, after two years of upward growth spurred by the pandemic, started to slow down and lose momentum, with tech giants announcing massive layoffs.
Tech companies began to rely more on their deposits, many of which SVB held, and requested their money. However, as banks simply do not keep all deposits in cash, they had to sell a bond portfolio to meet client demands and suffered a $1.75 billion loss from that sale. Things moved fast from here, so let’s break it down day-by-day:
Silicon Valley Bank announces to investors that it needs to raise capital to recover its losses, sending both clients and investors into a panic and causing a bank run.
A bank run is when lots of clients ask to make withdrawals because they don’t believe the bank can pay its debts and cover its financial obligations; just one day after this announcement, SVB was facing a large number of clients requesting withdrawals at a pace with which they could not keep up.
From Wednesday to Friday, more and more clients asked for their money and this frenzy resulted in the bank collapse and the intervention of the U.S. Federal Government. The Biden administration entered the picture to prevent more damage and closed a second bank, Signature, promising those who had money with SVB will get their money back, even those that were uninsured.
In response to the collapse of SVB, the FDIC created the Deposit Insurance National Bank of Santa Clara, which opened on March 13th. The role of this bank is simple: give people at least some of their money back.
There are a few ways for the FDIC to get the maximum amount from SVB’s assets:
Another bank acquires SVB (and gets their deposits).
Without a bank willing to buy SVB, the FDIC sells SVB’s assets over time, giving proceeds to depositors.
As we wait to see what happens, it’s key to realize how we got here. In just one day, customers tried to withdraw 25% of the bank’s total deposits. And in contrast to bank runs that happen in years past, the easy access users have to their accounts means that people can transfer money from anywhere; they don’t have to actually go to the bank. This led to an unprecedented rush of clients requesting withdrawals.
Thanks to SVB’s risk-friendly policies and general startup-friendly outlook, it was the bank of choice for many startups. It may be easy to add to the panic, but the US government is well-equipped to handle this challenge: Biden has assured the American public that SVB won’t require a taxpayer-funded bailout; the money being used by the FDIC comes from insurance premiums from banks and interest from U.S. government obligations.
As we move forward, it’s important to remember that this is not the first (nor the last) time that such a situation has occurred and to not lose faith in startups and their power; the startup ecosystem is strong and will recover. If you’re eager to keep up to date with the latest happenings in the tech sector, we have just the thing: our 2023 global report.