Silicon Valley Bank (SVB) was once one of the most successful and influential banks in the US, serving as a major lender and partner to the tech sector. Founded in 1983, the bank grew to become the 16th-largest in the US, with $210 billion in assets. Over the years, its client list included some of the biggest names in consumer tech, such as Airbnb, Cisco, Fitbit, Pinterest and Square.
However, in March 2023, SVB collapsed with astounding speed, becoming the second-largest bank failure in US history, behind the collapse of Washington Mutual in September 2008. The bank was shut down by the California Department of Financial Protection and Innovation (DFPI), which appointed the Federal Deposit Insurance Corporation (FDIC) as its receiver. The DFPI said that it took over and closed the distressed bank to protect deposits.
Silicon Valley Bank - Image by Google
What caused SVB downfall? According to reports, there were several factors that contributed to the bank’s demise. One of them was the broader slowdown in the tech sector, which reduced the demand and profitability of SVB loans and investments. Another factor was the increase in interest rates, which eroded the value of SVB securities portfolio. A third factor was the loss of confidence among SVB depositors, who withdrew large amounts of money from the bank amid rumors of its financial troubles.
The crisis unfolded rapidly in the first week of March 2023. On Wednesday evening, March 8, SVB announced that it was planning to raise $2 billion to “strengthen its financial position” after suffering losses. It also indicated that 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.
By Thursday morning, March 9, SVB shares began to see a massive sell-off. Later that day, SVB CEO Gary Becker pleaded with tech investors to “stay calm”. He said that the only danger posed to SVB was if "everybody is telling each other that SVB is in trouble". However, his words failed to reassure the market. In fact, some tech titans, including Peter Thiel, reportedly warned startup founders to reduce their exposure to SVB. By the end of the day, SVB shares had fallen by 60%.
On Friday morning, March 10, CNBC reported that SVB had been unable to raise the cash it had been hoping to assemble, and was looking for a buyer as deposit outflows continued to accelerate. The bank even called the New York Police Department on Friday morning as customers began lining up outside its Park Avenue offices to get their money, but officers who arrived on the scene left after determining “there was nothing criminal” happening. By noon Friday, March 10, California state and federal banking regulators had seen enough and announced they were taking over SVB deposits and putting the bank into receivership.
What happens to SVB customers now? According to the FDIC, all depositors of SVB will have access to their insured deposits. The FDIC said that it will pay out up to $250,000 per depositor through checks or wire transfers within a few days. Customers who have more than $250,000 in their accounts will become creditors of the failed bank’s estate and may receive some or all of their money back depending on how much is recovered from SVB assets.
As for SVB borrowers, they will still have to repay their loans according to their original terms. The FDIC said that it will continue to service SVB loans until they are sold or transferred to another lender. Customers who have questions about their loans can contact the FDIC at 1-800-823-2514 or visit www.fdic.gov/svb.
The FDIC also said that it is working with other banks to provide assistance and options for SVB customers who may need new banking services. The FDIC said that it will announce any arrangements with other banks on its website and through local media outlets.
The FDIC estimates that the cost of resolving SVB will be $12 billion, which will be covered by its deposit insurance fund. The FDIC said that no taxpayer money will be used for this purpose.
The collapse of SVB has sent shockwaves across the global financial markets and raised questions about the stability and regulation of the banking sector. US President Joe Biden told Americans on Monday, March 13, that they “can rest assured that our banking system is safe”, adding: "We will do whatever is needed on top of all this". However, some analysts and experts have warned that SVB failure could be a sign of more trouble ahead for the tech and financial industries.
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