Another venture investor, TSVC partner Spencer Greene, also criticized investors who “were wrong on the facts” about SVB’s position. Here’s what we know about the bank’s downfall, and what might come next. The Federal Reserve also noted that the rapid spread of information through social media networks exacerbated the speed and severity of deposit outflows.
The Indicator from Planet Money
Within 48 hours, a panic induced by the very venture capital community that SVB had served and nurtured ended the bank’s 40-year-run. So, while a broader contagion is unlikely, smaller banks that are disproportionately tied to cash-strapped industries like tech and crypto may be in for a rough ride, according to Ed Moya, senior market analyst at Oanda. We’ll do whatever is needed,” President Joe Biden said Monday morning.
Silicon Valley Bank
Though boring by Silicon Valley’s usual standards and little-known outside business circles, the bank played a critical role in supporting the tech sector during its recent boom in valuations. SVB also had around 90% of its accounts with more than $250,000 in deposits, which is “higher than your typical bank,” Faulkner said. This meant a majority of the bank’s deposits were not insured by the government. After backing young tech startups during the dot-com bubble of the ’90s, the company narrowly avoided disaster when the bubble burst and SVB’s stock fell more than 50% in 2001, The New York Times reported in 2015.
With CEO Roger Smith at the helm, SVB sought to provide banking services and credit to Silicon Valley-based tech startups. Many startup executives whose companies banked with SVB are now also likely facing a payroll crisis, Hargreaves said, because the FDIC is authorized to release only insured deposits of up to $250,000. That heightens the risk that these companies could announce furloughs or layoffs of dozens or even hundreds of employees, he said. Established in 1983, Silicon Valley Bank was, just before collapsing, America’s 16th largest commercial bank. It provided banking services to nearly half of all US venture-backed technology and life science companies.
As of March 10, Silicon Valley Bank reported nearly $167 billion in total assets and $199 billion in deposits. First Citizens Bank will purchase about $72 billion in assets at a discounted rate of $16.5 billion. FDIC will remain in control of nearly $90 billion in assets and securities in its receivership. Other issues include a lack of money from deposits for immediate expenses such as payroll. Large tech companies with significant cash in SVB include Etsy, Roblox, Rocket Labs and Roku. Many startups left money in their SVB primary account instead of using other accounts — such as a money market — to pay expenditures.
Until shortly after the failure of Silicon Valley Bank, its (now-former) CEO Greg Becker was a director of the Federal Reserve Bank of San Francisco. Powell started cranking up rates to slow inflation, and told Congress this week that he expects to let them get as high as 5.75 percent, which is a lot higher than zero. 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. In addition to Silicon Valley Bank, other banks were facing solvency issues such as Signature Bank and Credit Suisse. UBS agreed to buyout Credit Suisse for $3 billion Swiss francs (or $3.25 billion) in a government-brokered deal on March 19.
The intervention does not amount to a 2008-style bailout, however, which means investors in the company’s stock and bonds will not be protected. When interest rates rise, bond prices fall, so the jump in rates eroded the value of SVB’s bond portfolio. The portfolio was yielding an average 1.79% return last week, far below the 10-year Treasury yield of around 3.9%, Reuters reported. Investors will also continue to monitor for any further impact on other banks. The Treasury Department said Secretary Janet Yellen discussed the situation at a meeting she convened with financial regulators. Both of these banks were relatively small – with about $200 million in deposits combined.
Bank run
- Wells Fargo analyst Shaw also said other banks were hit by panic selling.
- Administrators will sell off assets to pay off creditor claims.
- According to the FDIC, this is the second-largest bank failure in U.S. history, behind the collapse of Washington Mutual in September 2008.
- With CEO Roger Smith at the helm, SVB sought to provide banking services and credit to Silicon Valley-based tech startups.
- At the root of SVB’s problems there were ill-fated investment decisions.
These investments didn’t look bad back then, as the bank was likely to hold on to the bonds for some time and see them through to maturity. But several recent factors combined to turn these financial decisions into the beginning of SVB’s demise. While these losses are just on paper – meaning they’re not realized until the assets are sold – they still can increase a bank’s overall risk. For depositors with $250,000 or less in cash at SVB, the FDIC said that customers will have access to all of their money when the bank reopens. The short answer is that SVB did not have enough cash to pay depositors so the regulators closed the bank.
Customers
U.S. taxpayers did not directly fund Silicon Valley Bank depositor losses. According to the Federal Reserve, the bank’s failure cost the Deposit Insurance Fund around $16.1 billion. The FDIC manages the Deposit Insurance Fund, which is funded through assessments on FDIC-insured banks. Banks pay assessments based on their insured deposits and their total liabilities. Silicon Valley Bank clients continued to take their money out throughout the first quarter of 2023. Slow growth within the technology sector prompted the bank’s parent company to inform investors that it expected reduced growth and income for the fiscal year.
- On March 22, the Fed said it would raise interest rates by another quarter of a percentage point, less than the half a point it was expected to raise rates, but also a sign it remains focused on fighting inflation.
- 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.
- SVB isn’t the only financial institution whose investments into government bonds and other assets have fallen dramatically in value.
- Right now, rumors are flying in WhatsApp groupchats full of founders scrambling for cash.
Financial system
They deposited large amounts of cash from investors because tech was in high demand during the pandemic, said Jay Jung, founder and managing partner of Embarc Advisors. Banks use depositor money to make loans and invest in securities, typically long-term investments. Federal banking laws require banks to retain a portion of their deposits to cover customer withdrawals. But when a bank run occurs, depositors may seek to withdraw more money than is available.
Impact on Depositors and Investors
The ramifications could be far-reaching, with concerns that startups may be unable to pay employees in coming days, venture investors may struggle to raise funds, and an already-battered sector could face a deeper malaise. Just two days after SVB failed, New York-based Signature Bank was shut down by regulators, becoming the third-largest bank failure in U.S. history (right behind SVB). California-based Silicon Valley Bank was closed Friday morning by the state’s financial regulator, the Federal Deposit Insurance Corporation announced, becoming the largest bank to fail since the 2008 financial crisis. Depositor panic initiated by the SVB and Signature failures prompted a run on First Republic Bank of San Francisco, too, causing it to collapse in May 2023. Once again, federal regulators found that First Republic had grown rapidly The Wisdom of Finance and over-relied on uninsured deposits. The bank’s stock plummeted 60% Thursday and dragged other bank shares down with it as investors began to fear a repeat of the global financial crisis a decade and a half ago.
He even counseled his portfolio companies to keep their funds at SVB as rumors swirled. The FDIC typically sells a failed bank’s assets to other banks, using the proceeds to repay depositors whose funds weren’t insured. Amid concerns about the bank’s stability, some venture capital funds, including Peter Thiel’s Founders Fund, advised portfolio companies to pull money out of SVB.
Debate over government intervention
“Everyone was like, ‘Oh you want to do SVB, otherwise people are sketched out if you don’t,’” she said. But what led to such a disastrous outcome for a lender that had established itself as a successful financial institution? At the root of SVB’s problems there were ill-fated investment decisions. The FDIC formally took control of its assets on Friday after the bank was shut down by the California Department of Financial Protection and Innovation.
