Silicon Valley Bank (SVB), a financial services provider that is well-regarded for funding start-ups and technology companies, collapsed in a matter of 48 hours.
The collapse of SVB was caused by a variety of factors with the main reason being the Federal Reserve’s interest rate hikes in 2022. These increases negatively affected tech company stocks largely responsible for SVB’s success and reduced the number of deposits SVB received. Companies were also pulling their funds as they were struggling financially, as shown by the workforce reductions carried out recently by several tech companies. The interest rate increases negatively affected the value of mortgage bonds that SVB had invested in, resulting in the bank losing money.
As the bank suffered a cash crunch, it sold a portion of its bond investments and suffered a $1.8 billion loss. In an attempt to gain liquidity and get cash, the bank then decided to sell its shares. On Wednesday, March 8th, SVB notified investors that it needed to raise $2.25 billion to balance its books. This raised flags with major players in the financial industry who warned their clients to pull their funds from SVB. This led to a panic, with SVB’s clientele pulling their funds and transferring them to larger banks.
On Thursday, March 9th, $42 billion had been withdrawn from SVB, leaving the bank with a negative cash balance of $958 million. In an effort to save the bank, SVB’s CEO Greg Becker made calls to clientele asking for trust but the call failed to garner the necessary confidence. The panic created resulted in the bank’s collapse and a large number of SVB’s clients failing to withdraw their money.
This state of events occurred over a period of 48 hours. SVB’s share price fell by 60% on Thursday, March 9th. It fell by a further 66% the following day, with trading in its shares later halted. The bank was shut down by California regulators and placed under the control of the Federal Deposit Insurance Corporation (FDIC). “The precipitous deposit withdrawal has caused the Bank to be incapable of paying its obligations as they come due,” the California financial regulator stated. They said, “The bank is now insolvent.”
Insured depositors would reportedly be able to get their cash on Monday, March 13th while uninsured depositors would have to wait. “To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB),” the FDIC said in a statement. “At the time of closing, the FDIC as receiver immediately transferred to the DINB all insured deposits of Silicon Valley Bank.”
The bank’s financial problems also affected its clientele in New York City. SVB’s website shows that the city only has a single branch of the bank. This branch is in Manhattan and on the morning of Friday, March 10th, a group of tech founders showed up at the branch, attempting to pull their cash. The clients who wanted to withdraw their funds were blocked from doing so by SVB.
One of the founders who was present at the bank was former Lyft executive Dor Levi, who was communicating with a journalist who posted details of the event on Substack. He detailed how NYPD officers had to be called to the SVB branch to ensure things did not get out of control. Similar scenes were witnessed in Menlo Park, California where clientele lined up to withdraw their money.
Silicon Valley Bank, based in Santa Clara, California, was founded in 1983 and in its 40-year existence became well regarded for financing start-ups, venture capitalist firms, and technology companies. According to CNN Business, SVB provided financing for at least 50% of venture-backed technology and healthcare companies in the United States. The bank was not particularly famous outside Silicon Valley but it was the 16th biggest bank in the U.S. SVB suffered the biggest collapse by a bank since 2008. While the bank’s collapse will not affect the majority of the financial industry in the U.S., it will likely affect the smaller banks.