But that announcement spooked the bank’s clients, who got worried about SVB’s viability, and then proceeded to withdraw even more money from the bank — a textbook definition of a bank run. Regulators announced the takeover after what was effectively a run on the bank. Depositors rushed to withdraw their money amid fears SVB wouldn’t be able to meet redemption requests. Regulators trying to stem panic among customers shut down Silicon Valley Bank and Signature Bank within days. Starting in 2020, around the time of the pandemic, those deposits skyrocketed, as The Indicator From Planet Money explained.
So when the Federal Reserve started to hike rates rapidly to combat inflation, SVB’s bond portfolio started to lose significant value. The initial market shock of Covid-19 in early 2020 quickly gave way to a golden period for startups and established tech companies, as consumers spent big on gadgets and digital services. So if you are, let’s say, a bank specializing in startups, do you know what ZIRP world does to you? Well, my children, according to the most recent annual filing from SVB, bank deposits grew as IPOs, SPACs, VC investment and so on went on at a frenetic pace. A third of Y Combinator companies won’t be able to make payroll in the next 30 days, according to YC CEO Garry Tan.
The bank catered primarily to tech startups and investors active in the sector. The shutdown and takeover of Silicon Valley Bank by regulators on Friday can be traced to the US Federal Reserve raising interest rates and souring the risk appetite of investors. Governments and regulators around the world, including in the UK and Australia, are checking for SVB exposure in their corporate and banking sectors. But bonds have an inverse relationship with interest rates; when rates rise, bond prices fall.
Investors have less appetite for risk when the money available to them becomes expensive due to the higher rates. This weighed on technology startups – the primary clients of Silicon Valley Bank – because it made their investors more risk-averse. If SVB were able to hold those bonds for a number of years until they mature, then it would receive its capital back. However, as economic conditions soured over the last year, with tech companies particularly affected, many of the bank’s customers started drawing on their deposits.
A prominent tech lender, SVB ranked as the 16th-largest bank in the US prior to its collapse into FDIC receivership, according to the Federal Reserve. All told, customers withdrew a staggering $42 billion of deposits by the end of Thursday, according to a California regulatory filing. Within 48 hours, a panic induced by the very venture capital community that SVB had served and nurtured ended the bank’s 40-year-run.
For those outside of Silicon Valley and the tech space, Silicon Valley Bank was not a household name. Many of its clients included venture capital firms, what is nfp startups and wealthy tech workers. When the Federal Reserve made its announcement, it clarified that none of the losses would be taken on by taxpayers.
So of course, the accounts at Silicon Valley Bank were insured by the FDIC — but only up to $250,000. Though the problems appear to be isolated at SVB, the run on the bank sparked concerns about the banking sector as a whole. On Thursday, shares of all kinds of lenders, including the big banks, sagged. Morgan, Wells Fargo, and Bank of America were all down about 5%. Those relationships meant, long-term, more referrals to other people looking to get their own startups off the ground and expanding into private banking to wealthy clients, he said.
- He says about a third of the 60-odd companies in his portfolio used SVB, and that by the end of Thursday, all except one had pulled their funds.
- Later in the day, however, the Federal Deposit Insurance Corporation (FDIC) then announced that SVB was shut down and placed under its receivership.
- Another venture investor, TSVC partner Spencer Greene, also criticized investors who “were wrong on the facts” about SVB’s position.
Often, he said, SVB tied a company’s loan to an executive’s mortgage — and that a default on one would trigger a default on the other. But it remained little known outside of tech circles — until this week. It even expanded to capitalize on the ties between the tech community’s apparent love for California wine.
Who’ll blink first: The world’s largest music company or TikTok?
Fed officials said, however, that they do not expect to have to use any of that money, given that the securities posted as collateral have a very low risk of default. Treasury Secretary Lawrence Summers who said in an interview on Friday “I don’t think this is a time for moral-hazard lectures or for talk about teaching people lessons.” There were also “a large number of startups and investors” who had “significant https://g-markets.net/ exposure to SVB UK,” Dom Hallas, executive director of Coadec, which represents British startups, said on Twitter. The BTFP “will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress,” the Fed said. That didn’t bode well for the bank when crypto plunged as a result of FTX’s collapse last year.
This spooked investors such as General Atlantic that SVB had lined up for the stock sale, and the capital raising effort collapsed late on Thursday. Falvey, who started his career at Wells Fargo and consulted for a bank that was seized during the financial crisis, said that his analysis of SVB’s mid-quarter update from Wednesday gave him confidence. The bank was well capitalized and could make all depositors whole, he said. He even counseled his portfolio companies to keep their funds at SVB as rumors swirled.
Why Did the Government Promise to Make SVB Depositors Whole?
These assets tend to have relatively low returns but also relatively low risk. He says about a third of the 60-odd companies in his portfolio used SVB, and that by the end of Thursday, all except one had pulled their funds. Beyond tech, this caused some shakiness across the banking industry, especially regional banks, amid concerns that other banks could be in trouble or that contagion could set in. (It’s important to note for consumers here that, really, the money you have in the bank right now is almost definitely fine.) It also had ripple effects in Europe. SVB’s blowup is a big deal and a symptom of bigger forces in motion in tech, finance, and the economy.
On Wednesday, March 8, SVB’s parent company, SVB Financial Group, said it would undertake a $2.25 billion share sale after selling $21 billion of securities from its portfolio at a nearly $2 billion loss. By Friday morning, trading of the stock was halted, and there was reporting SVB was in talks to sell. Big-name VCs such as Peter Thiel and Union Square Ventures reportedly started to tell their companies to pull their money out of the bank while they could. When signs of shakiness at SVB began to show, many companies and people with money in SVB moved to pull it out earlier in the week — actions that, ironically, contributed to the bank’s demise. The roots of SVB’s collapse stem from dislocations spurred by higher rates. As startup clients withdrew deposits to keep their companies afloat in a chilly environment for IPOs and private fundraising, SVB found itself short on capital.
A Financial Adviser
The entity created by federal regulators to oversee SVB, the Deposit Insurance National Bank of Santa Clara, has quite a few things to sort out. The bank’s stock price fell by 60% on Thursday, and as its share price continued to sink overnight. People walk through the parking lot at the Silicon Valley Bank headquarters in Santa Clara, Calif., on March 10, 2023.
Why did Silicon Valley Bank fail?
But it ended up being the government, not investors, who came to depositors’ rescue. I think it might have been possible to staunch the bleeding if Becker had been even halfway good at PR. Brad Hargreaves, a startup founder who previously served on boards of companies that did business with SVB, said the bank was unusual in that often played a dual role as corporate and personal lender to CEOs. That appears to have morphed into a self-fulfilling prophecy, with tech titans including Peter Thiel reportedly warning startup founders to reduce their exposure to SVB. By Thursday morning, SVB shares began to see a massive sell-off. Founded in 1983, the bank grew to become the 16th-largest in the U.S, with $210 billion in assets.
silicon valley bank
Later in March, First Citizens Bank bought up all deposits and loans of the failed bank. That’s in large part because the tech startup world is tightly plugged into itself, with founders and executives constantly trading information and boasting on Twitter or text chains or Signal chats. One tech company pulling its money out of a bank is a story that quickly cascades to the leaders of other companies, who then tell leaders of other companies. Insured depositors will have access to their insured deposits by Monday morning March 13, according to the FDIC. Uninsured deposits totaled a whopping $151 billion at the end of 2022, according to public filings. Regulators were forced to shut down SVB to protect its depositors after a run on the bank ensued this week.
The overall banking industry is likely fine, and again, SVB probably would have made it through had everybody not freaked out at the same time. That said, SVB’s collapse isn’t great, especially for the people who are going to be stuck holding the bag. There continue to be concerns about the health of the broader banking system. Part of SVB’s specific problem is that it was so concentrated in its business. SVB catered to venture capital and private equity — as that sector has done well over the past decade, so has SVB. But because the bank was also very concentrated with high exposure to one industry, that opened it up to risk.