The collapse of the Silicon Valley Bank (SVB) has shook the financial industry in the U.S. One which has made President Joe Biden to comment on the issue.
Many businesses that are linked to SVB are already having a difficult time. With the financial crisis of 2008 still in my mind, financial experts have been discussing this high-profiled collapse.
In this article, we’ll open you to what you need to know about the Silicon Valley Bank and its collapse.
What is Silicon Valley Bank?
SVB was a commercial bank founded in 1983 and headquartered in Santa Clara, California. Until its collapse, SVB was the 16th largest bank in the United States and was heavily skewed toward serving companies and individuals from the technology industry.
Nearly half of U.S. venture capital-backed healthcare and technology companies were financed by SVB. Companies such as Airbnb, Cisco, Fitbit, Pinterest, and Block, Inc. have been clients of the bank.
In addition to financing venture-backed companies, SVB was well known as a source of private banking, personal credit lines, and mortgages to tech entrepreneurs. Silicon Valley Bank required an exclusive relationship with those borrowing from the bank.
As of the last call report of the bank, filed on December 31, 2022, it held $209 billion in total assets, with $175.5 billion in total deposits, of which the bank estimated $151.6 billion (86.4 percent) were uninsured.
What happened to SVB?
As the preferred bank for the tech sector, SVB’s services were in hot demand throughout the pandemic years.
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.
Many tech companies used SVB to hold the cash they used for payroll and other business expenses, leading to an influx of deposits. The bank invested a large portion of the deposits, as banks do.
The seeds of its demise were sown when it invested heavily in long-dated US government bonds, including those backed by mortgages. These were, for all intents and purposes, as safe as houses.
But bonds have an inverse relationship with interest rates; when rates rise, bond prices fall. So when the Federal Reserve started to hike rates rapidly to combat inflation, SVB’s bond portfolio started to lose significant value.
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.
SVB didn’t have enough cash on hand, and so it started selling some of its bonds at steep losses, spooking investors and customers.
It took just 48 hours between the time it disclosed that it had sold the assets and its collapse.
The Collapse of Silicon Valley Bank
The current market value of these bonds decreased as the Federal Reserve raised interest rates to curb the 2021–2023 inflation surge. Higher interest rates also raised borrowing costs throughout the economy and some Silicon Valley Bank clients started pulling money out to meet their liquidity needs.
To raise cash to pay withdrawals by its depositors, SVB announced on March 8 that it had sold over US$21 billion worth of securities, borrowed US$15 billion, and would hold an emergency sale of some of its treasury stock to raise US$2.25 billion. The announcement, coupled with warnings from prominent Silicon Valley investors, caused a bank run as customers withdrew funds totaling US$42 billion by the following day.
On the morning of March 10, 2023, the California Department of Financial Protection and Innovation (DFPI) seized SVB and placed it under the receivership of the Federal Deposit Insurance Corporation (FDIC). The FDIC established a deposit insurance national bank, the Deposit Insurance National Bank of Santa Clara, to service insured deposits and announced that it would start paying dividends for uninsured deposits the following week; the dividends were funded by proceeds from the sale of SVB assets.
Some 89 percent of the bank’s US$172 billion in deposit liabilities exceeded the maximum insured by the FDIC. Two days after the failure, the FDIC received exceptional authority from the Treasury and announced jointly with other agencies that all depositors would have full access to their funds the next morning.
Closing Thoughts
Financial experts have analyzed the effect of the SVB collapse. This include the prediction of best-selling author, Robert Kiyosaki who says another bank is expected to collapse.
