Silicon Valley Bank collapse
If you work in the technology industry, it’s likely that you are familiar with Silicon Valley Bank. However, if you haven’t heard of this seemingly localised bank, don’t worry – it primarily served a specific clientele of startups, venture capitalists, and technology firms, with only a few branches despite holding billions in deposits.
Unfortunately, the bank has since collapsed, marking the second-largest bank failure in US history, after banking regulators shut it down on Friday, March 10.
Just two days before, Silicon Valley Bank had signalled a cash shortage and attempted to raise money by selling shares and selling the bank, but these actions spooked investors and ultimately led to the bank’s demise.
The federal government has since stepped in to guarantee that all depositors’ funds will be accessible by March 13, reassuring Americans that their deposits are safe and that the banking system is secure.
The incident has sent shock waves throughout the tech industry, causing many SVB clients to withdraw their funds earlier in the week, contributing to the bank’s collapse.
This event has also caused some instability in the banking industry, particularly in regional banks, as concerns arise about the possibility of other banks being in trouble or facing contagion.
What is SVB?
Founded in 1983 in Santa Clara, California, Silicon Valley Bank swiftly became the go-to bank for the emerging tech sector and its financiers, as intended. In fact, the bank boasted banking services for nearly half of all US venture-backed startups as of 2021 and served as a banking partner for numerous venture capital firms funding such startups.
Known as the “financial partner of the innovation economy,” SVB was deeply entrenched in the financial infrastructure of the tech industry, particularly with startups. This symbiotic relationship has been beneficial for SVB during the tech industry’s prosperous times, but not so much during its downturns.
However, for a long time, venture capitalists invested vast sums of money into numerous startups, with SVB serving as the intermediary.
At the time of its collapse, SVB had over $200 billion in assets, which pales in comparison to JPMorgan Chase’s $3.31 trillion.
Despite this, SVB’s failure is still the most significant bank failure since the Great Recession, and it is one of the most prominent US banks to fail in history.
Despite being relatively little known, it was the 16th largest bank in the US. The collapse of Silicon Valley Bank is the largest bank failure in the United States since the 2008 financial crisis.
Why did SBV collapse?
Silicon Valley Bank’s downfall was largely due to a traditional bank run – (when customers panic and everyone tries to get their money out at once) – triggered by signs of trouble in the second week of March.
The bank accepts deposits from clients and invests them in safe securities such as bonds. However, as interest rates increased, the value of these bonds decreased. This would not normally be an issue, but because there was a slowdown in the tech industry and venture capital, deposit inflows decreased, and clients began withdrawing their money.
On March 8, SVB’s parent company, SVB Financial Group, announced a $2.25 billion share sale after selling $21 billion of securities from its portfolio at a loss of nearly $2 billion. The aim was to strengthen its balance sheet, but it instead frightened markets and clients.
No other bank wanted to help SVB because it was an isolated institution that didnt play well with others. In fact other banks and investors did there part to add to the specualtion, casuing a rush on reserves.
James Pearce, Silcon Valley Executive
The share price of SVB Financial plummeted on Thursday, and by Friday morning, trading of the stock was halted, with reports suggesting SVB was in talks to sell.
Prominent venture capitalists, including Peter Thiel and Union Square Ventures, reportedly advised their companies to withdraw their money from the bank while they still could.
By about midday Friday, regulators shut down the bank.
Is the tech industry to blame?
The bank’s downfall is in part due to its narrow focus on the venture capital and private equity industries. As these sectors thrived over the last decade, so did SVB. But because the bank had a high concentration of clients in one industry, it was susceptible to risk.
Another bank – Silvergate, which catered to crypto, didn’t help the situation as it announced it was winding down on Thursday, and once there were signs of trouble at SVB, everybody kind of freaked out.
“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”
VOX
SVB being tied to tech certainly played a role.
The tech startup community is highly interconnected, with founders and executives constantly sharing information and updates on various platforms like Twitter, text chains, and Signal chats. Therefore, when one tech company withdraws its funds from a bank, the news quickly spreads to the leaders of other companies, who in turn share it with their own network.
It wasn’t just the tech founders talking, a wave of venture capitalists were telling their portfolio companies to take their money out of SVB immediately.
fraud, Lawsuits, and foul play as fallout begins
Shareholders of Silicon Valley Bank have filed a class action against SVB, its CEO Greg Becker and CFO Daniel Beck, following the bank’s collapse. The lawsuit alleges that they failed to disclose the bank’s vulnerability to rising interest rates and the potential for a bank run.
The lawsuit is likely the first of many legal actions that will be taken against the bank, which was popular in the Silicon Valley tech start-up community.
The filed lawsuit seeks unspecified damages for investors between June 16, 2021, and March 10, 2023.
In Monday’s lawsuit, shareholders led by Chandra Vanipenta said the bank failed to disclose how rising interest rates would undermine its business model, and leave it worse off than banks with different client bases.
ARE We HEADING For ANOTHER financial crisis?
The aftermath of Silicon Valley Bank’s failure is still unfolding so it won’t be clear straightaway but economists generally believe that the impact of SVB’s collapse is unlikely to trigger a financial crisis similar to the one that occurred in 2007-2008. This is because SVB was concentrated in one industry and had minimal dealings with other banks.
“The SVB situation definitely has people worried but I don’t think it’s likely to turn into a Lehman type of situation, especially given how aggressively the Fed has intervened, including by promising to protect even uninsured deposits,” David Skeel, professor of corporate law at the University of Pennsylvania Law School, told Al Jazeera.
“I think any direct fallout is likely to become clear pretty quickly, although it’s certainly possible that there are other banks that are in a similar predicament due to the rise in interest rates.”
Financial regulation has also been tightened up significantly since the 2007-2008 crisis.
According to an Al Jazeera article, William T Chittenden, associate professor of finance and economics at Texas State University, said he believes the contagion from SVB will be limited.
“With the BTFP, banks will be able to borrow against those securities at par value, allowing banks to avoid selling them at a loss. This should give banks the liquidity they need to meet any unexpected demand for cash from their depositors,” Chittenden told Al Jazeera.
“We will know if this is working or if there is wide-spread fallout from SVB’s failure in the next few days,” he added. “The vast majority of banks in the US are financially sound and with the new BTFP, depositors should feel at ease.”
Tech industry must learn its not above the state
In an article for the Guardian, James Ball argues the collapse of SVB is proof that ‘big tech’ isn’t above the state, and must realise it can’t go it alone.
Silicon Valley Bank (SVB) rose to become one of the top 20 banks in the US by catering to the needs of west coast tech startups, but it turns out that its growth was not without risks. The bank served over 2,500 venture capital firms and nearly half of the US’s venture-capital-backed technology and life-science companies, allowing them to keep large balances despite only $250,000 being insured per account. SVB had failed to hedge against rising interest rates, despite the global anticipation, and had lobbied for deregulation, reducing its regulatory oversight.
“Big tech has long thought itself above the state. Silicon Valley Bank’s meltdown is stark proof that it isn’t”
The Guardian
As interest rates increased, clients withdrew cash, forcing SVB to sell its bond portfolio at a loss to cover the withdrawals. When it failed to find a buyer, the bank collapsed, raising concerns about a wider run on banks and the impact on viable businesses, particularly early-stage startups that rely on investors’ money in their bank accounts to fund their operations. SVB’s UK subsidiary had billions in deposits, mainly from the tech sector, prompting calls for intervention.
HSBC bought SVB UK to reassure customers that their deposits were safe, while the US Federal Reserve promised full access to depositors’ money, funded by the Deposit Insurance Fund, which comes from fees paid by the banking industry.
Although this crisis is not the same as the 2008 financial crisis, it highlights the need for government and central bank support for financial institutions and their clients. The tech sector, which believed it was above the state, needs to realise that it is still connected to the wider banking system and owes a duty to society.