Silicon Valley Bank: why did it collapse and is this the start of a banking crisis? Banking

February 27, 2024 0 Comments

what is svb

It also indicated it had seen an increase in startup clients pulling out their deposits. At the same time, the bank signaled that its securities had lost value as a result of higher interest rates. Founded in 1983, the Santa Clara, Calif.-based institution provided banking services and took deposits for Silicon Valley startups, venture capital firms and tech heavyweights.

what is svb

Of course, one other problem is that a lot of investors were also banking at SVB, too. “If you are a startup company, you don’t look like a normal business,” says Sean Byrnes, a startup founder and investor who says he has used SVB for years. “Most banks, if you go to them and ask for a loan, they’ll laugh at you.” SVB was also often willing to work with founders who weren’t US citizens, which would be an obstacle for more traditional banks. 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.

Will this affect interest rates?

Yokum added there could be more trouble ahead as the Fed continues to increase interest rates in an attempt to cool down the economy and bring down inflation, especially if it does so aggressively. “The more rates go up, the more the banks on the edge start to become a problem,” Yokum said. Our new banking platform offers a clear, structured view across your accounts. Thousands of finance teams are already drilling down to make informed decisions with SVB Go. During the 1980s, the bank grew with the local high-tech economy, achieving 21 consecutive quarters of profitability. The appetite to keep raising rates will now be tested if central banks become concerned that SVB’s problems are indicative of a broader weakness in corporate balance sheets caused by rising rates.

That meant the bank needed to get liquidity — so it sold $21 billion of securities, resulting in an after-tax loss of $1.8 billion. It also came up with a plan to sell $2.2 billion in shares to help shore itself up. Some investors are loaning their companies money to make payroll. Penske Media, the largest investor of this website’s parent company, Vox Media, told The New York Times that “it was ready if the company required additional capital,” for instance. That’s good, because Vox Media has “a substantial concentration of cash” at Silicon Valley Bank.

  1. If the FDIC can’t find a healthy buyer for the bank, it will pay depositors the money that was in their account.
  2. That meant it made $13.9 million on FitBit’s IPO, for instance.
  3. An unexpected mass furlough or layoff is a nightmare for most companies — after all, you can’t make sales if the salesforce isn’t coming into the office.
  4. Central banks around the world have been raising rates over the past year to tame high inflation, with the US moving from near zero to more than 4.5% at a rapid pace.

In other words, if you had $250,000 in a Silicon Valley Bank account, you would get all of your money back. Despite being the 16th largest bank in the country, Silicon Valley Bank didn’t have enough assets to be subject to the extra rules and oversight. If the threshold was never changed, SVB would have been more closely watched by regulators. During a poker game, Bill Biggerstaff and Robert Medearis came up with the idea for Silicon Valley Bank. And in 1983, the two, along with the bank’s CEO Roger Smith, opened the first branch in San Jose, California.

If SVB’s assets can only be sold for, say, 90 cents on the dollar, it could encourage bank runs elsewhere. Even small disruptions to cash flow can have drastic effects on individuals, companies, and industries. So while one very likely outcome is that the uninsured depositors will eventually be made whole, the problem is that right now they have no access to that money. What happened is a little complicated — and I’ll explain farther down — but it’s also simple.

While the FDIC can protect depositors from losses, it can’t do the same for shareholders and unsecured debt holders. In other words, individuals and institutions that owned stock in SVB Financial Group may not get their money back. To help, the Federal Reserve announced on March 12 that it would invoke a systemic risk exception, meaning that all depositors would be made whole, even for those funds that were uninsured. Unfortunately, most of the accounts in Silicon Valley Bank held more than $250,000 of deposits, meaning most of the funds were uninsured. In most cases, this would mean account holders would lose any money above that threshold. As this was happening, some of Silicon Valley Bank’s customers—many of whom are in the technology industry—hit financial troubles, and many began to withdraw funds from their accounts.

UBS agrees to takeover of stricken Credit Suisse for $3.25bn

Silicon Valley Bank (SVB) was shut down in March 2023 by the California Department of Financial Protection and Innovation. Based in Santa Clara, California, the bank was shut down after its investments greatly decreased in value and its depositors withdrew large amounts of money, among other factors. Later in March, First Citizens Bank bought up all deposits and loans of the failed bank. If a member bank fails, its deposits — that’s the money you’ve put in said bank — are still insured for up to $250,000. Anything beyond that, and there’s no guarantee you’ll ever see again. “As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors,” the feds added.

what is svb

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. Silicon Valley Bank met its demise largely as the result of a good old-fashioned bank run after signs of trouble began to emerge in the second week of March.

Who Were the Main Investors in Silicon Valley Bank?

The bank takes deposits from clients and invests them in generally safe securities, like bonds. As the Federal Reserve has increased interest rates, those bonds have become worth less. Silicon Valley Bank provided business banking services for companies at every stage, but it was particularly well-known for serving startups and venture-backed firms. According to the company’s website, 44% of the venture-backed technology and healthcare initial public offerings (IPOs) in 2022 were clients of Silicon Valley Bank. On Friday, Silicon Valley Bank, a lender to some of the biggest names in the technology world, became the largest bank to fail since the 2008 financial crisis.

While the FDIC has guaranteed deposits of up to $250,000, depending on the size of the company, that money wouldn’t go very far. This doesn’t just apply to companies that deposited cash with SVB — it’s also a question for companies using other SVB instruments, like revolver loans or credit cards. A lot of other banks are also losing money on their securities. But the gossipy nature of Silicon Valley, and the fact that so many of these firms are entwined, made the possibility of a bank run higher for SVB than it was for other places. Right now, rumors are flying in WhatsApp groupchats full of founders scrambling for cash. I suspect, too, that we’ll start seeing scammers attempting to target panicky technology brothers, to extract even more cash from them.

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. Founded in 1983, the bank grew to become the 16th-largest in the U.S, with $210 billion in assets. Over the years, according to reports, its client list grew to include some of the biggest names in consumer tech like Airbnb, Cisco, Fitbit, Pinterest and Square. After New York state regulators shut down Signature Bank, which had become an important lender in the crypto industry, a storm appeared to be brewing around San Francisco’s First Republic Bank as well. Troubles there have eased but continue, and there are general jitters around US banks, especially regional ones, overall. In Europe, the long-troubled Credit Suisse was taken over by UBS in mid-March amid fresh turmoil.

“SVB offers financial and banking services to help, as you capitalize on business opportunities, raise capital, protect equity, manage cash flows and access global markets,” a message on the bank’s website says. SVB spooked investors after disclosing this week that it had taken a $1.8 billion hit from a $21 billion fire sale of its bond holdings. The bank faced a cash crunch due to surging interest rates and a recent meltdown in the tech sector led many customers to pare their deposits.

It told investors it needed to plug a hole caused by the sale of its loss-making bond portfolio. As the preferred bank for the tech sector, SVB’s services were in hot demand throughout the pandemic years. The FDIC insures bank deposits of up to $250,000 per depositor per bank for each account category.

In an interview with Bloomberg on Friday, ex-Treasury Secretary Larry Summers said SVB’s implosion shouldn’t pose a systemic risk to the US financial system as long as depositors are made whole. 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. Shares of SVB Financial, the bank’s parent, had plunged by a whopping 60% on Thursday. The stock was down by another 60% in premarket trading Friday until being halted. The bank was in talks to sell itself on Friday after efforts to raise outside capital failed. But by Friday afternoon, the feds had shuttered SVB entirely and placed its assets under the control of the Federal Deposit Insurance Corp.

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