Silicon Valley Bank Collapse: How and Why it Happened
Silicon Valley Bank in Santa Clara, California, was shut down by the California Department of Financial Protection & Innovation on Friday, March 10, 2023. The Federal Deposit Insurance Corporation (FDIC) was appointed Receiver. The general public is not informed in advance when a financial institution closes.
A bank run was the primary factor in Silicon Valley Bank’s shutting down. The business was not bankrupt or even close to insolvent, at least not until customers began scurrying for the door. However, banking is a business that depends just as much on confidence as it does on money; if it disappears, the game is over.
What is Silicon Valley Bank
In its 40-year existence, Silicon Valley Bank had consistently outperformed the competition. Clients of Santa Clara, California-based SVB included startups, venture capital companies, and affluent IT employees. It had grown to be a significant participant in the technology industry, where it competed effectively against bigger-name institutions.
Tech and tech-related businesses including Roku, Roblox, and Vox Media were among its clientele. (It turns out that its failure was largely due to this concentration on the technology industry.) But up until March, it was mostly unknown outside of the computer community.
Why Did SVB Collapse?
Customers of SVB Withdrawing More Cash for Their Start-Up Businesses
However, the majority of SVB’s clients were start-ups and other tech-focused businesses. This sector began to require more funding during the previous year. Due to the lack of available venture capital investment, firms were forced to use their already-placed cash. These funds were frequently deposited with SVB. And which was located at the epicenter of the tech startup universe.
Customers of SVB then started taking their deposits out. That wasn’t a big deal at first, but as a result of the withdrawals, the bank had to start liquidating its own assets to satisfy client withdrawal demands.
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US Federal Reserve Increasing Interest Rates.
The Federal Reserve’s aggressive intention is to raise interest rates to fight inflation. Furthermore, the recent decline in technology stock prices had a significant negative impact on (SVB). Over the last couple of years, the bank purchased bonds worth billions of dollars using customer deposits, like a conventional bank would.
Although the value of these assets decreased, they were generally secure investments that paid lower interest rates than comparable bonds. However, it could be safer, if it had been issued in the current context of higher interest rates. In most cases, this is not a problem because banks keep those for a long time unless they are forced to sell them in an emergency.
How it Happened
Between 2019 and 2022, Silicon Valley Bank saw rapid expansion, which led to the bank’s acquisition of sizable deposits and assets. A tiny portion of such deposits was kept in cash. But the majority were utilized to purchase Treasury bonds and other long-term obligations. These investments often have minimal risk levels and low returns.
Bonds issued by Silicon Valley Bank, however, were riskier investments as a result of the Federal Reserve raising interest rates in reaction to rising inflation. Silicon Valley Bank’s bonds lost value when investors could purchase them at greater interest rates. As this was going on, a number of clients of Silicon Valley Bank, especially many those of whom work in the IT sector—experienced financial difficulties and started taking money out of their accounts.
Silicon Valley Bank made the decision to sell some of its investments in order to handle these substantial withdrawals. But those sales were unsuccessful. Its first loss of $1.8 billion loss signaled the beginning of the bank’s demise.
Despite Silicon Valley Bank being among the largest banks, it did not possess enough assets. As a result, it was to be subjected to additional regulations and monitoring. However, if the regulators would have been keen on the threshold of SVB, it would not have collapsed.
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Effects of the Collapse of the SVB
Small Business Loans By Startup Clients
Due to the inability of many startups to recover funds, businesses were forced to take out loans in order to pay employees. Due to the California state rule requiring employees to be paid within a specific number of days, companies that were unable to access deposits in the future may have been forced to lay off staff, furlough workers, or even close their doors altogether.
Banking professionals are confident that other banks will stay stable despite these worries. They believe SVB was too focused on providing banking services to a riskier area of the economy. Also because financial compliance laws have been reinforced since the 2008 financial crisis, which preceded the Great Recession.
Venture Debt market Effects
The bank’s failure also affects the venture debt market, which has become more significant since venture capital firms have drastically reduced their investments. This market provides finance for entrepreneurs. For instance, one of the online retailers had to postpone seller reimbursements; some vendors received deposits via SVB.
Banks in the United States lost a total of $100 billion in market value over the course of two days. This is higher than banks in Europe which lost $50 billion. The difficulties that banks may have if interest rates rise and the market value of the bonds that they bought under low-rate policies decrease were emphasized by SVB’s losses. Some businesses have moved their deposits from smaller community banks like Silicon Valley Bank in search of safety with larger commercial banks, raising fears about additional banking sector volatility.
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Investors won’t have as much luck, though. The FDIC can shield depositors from losses, but it is unable to do the same for stockholders and holders of unsecured debt. To put it another way, people and organizations that held shares in SVB Financial Group might not be able to receive their money back.
The Collapse of Silicon Valley Bank
SVB was a sizable company with a distinctive life since it catered almost entirely to the technology sector and VC-backed businesses. It made significant progress in the area of the economy that took a beating last year.
Other banks have far wider geographic, client, and industry diversification. However, if the money that was placed at SVB can’t be released immediately, there can be economic repercussions, particularly in the US IT start-up scene.
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