Silicon Valley Bank Collapses in Bank Run
Silicon Valley Bank, founded in 1983 and specializing in banking for tech startups, faced a bank run and collapse on March 8, 2023. The parent company, SVB Financial Group, announced it had sold $21 billion of assets at a $1.8 billion loss and was going to sell $1.75 billion worth of shares to help plug that hole. This announcement caused a panic amongst key venture capitalists, who advised their companies to withdraw their money from the bank.
The bank held a total of $74 billion in loans, of which almost half – $34 billion – went to borrowers who used the money to buy or carry securities of their own. SVB was a top-20 bank in the United States by asset size, and a large percentage of venture capital backed startups in the country had a connection with them.
The pandemic bull run had inflated the value of tech startups and the funds of investors, resulting in a tripling of deposits at the regional bank from $62 billion at the end of 2019 to $189 billion at the end of 2021. SVB desired to invest the money, so it acquired U.S. Treasury and mortgage bonds that would not mature for several years but offer a relatively secure place to deposit the money- so long as interest rates did not grow. Multiple times, they did rise.
SVB was highly concentrated in its business and catered to venture capital and private equity, so when things got bad for its non-diversified group of clients, it very quickly got bad for the bank. Depositors tried to withdraw $42 billion, rendering the financial institution insolvent. The Federal Deposit Insurance Corporation (FDIC) stepped in to offer insurance coverage up to a certain limit per depositor, per bank, for each account ownership category.
In addition, the FDIC functions as the “receiver” of a failed bank, responsible for selling off the bank's assets and settling its debts, including any deposits that exceed the insured limit. The American government also announced the close of New York-based Signature Bank and offered a $25-billion backstop for the failing banks to pay their depositors.
0. “March 2023 Newsletter: A Look at Bank Solvency” Lyn Alden, 13 Mar. 2023, https://www.lynalden.com/march-2023-newsletter/
1. “How does a bank collapse in 48 hours? A timeline of the SVB fall” CNN, 13 Mar. 2023, https://www.cnn.com/2023/03/11/business/svb-bank-collapse-explainer-timeline/index.html
2. “The uncommon lending practices behind Silicon Valley Bank’s woes” CNBC, 16 Mar. 2023, https://www.cnbc.com/2023/03/16/the-uncommon-lending-practices-behind-silicon-valley-banks-woes.html
3. “Easy Loans, Great Service: Why Silicon Valley Loved Silicon Valley Bank” The Wall Street Journal, 16 Mar. 2023, https://www.wsj.com/articles/easy-loans-great-service-why-silicon-valley-loved-silicon-valley-bank-6b3f203e
4. “Silicon Valley Bank's failure, the government's depositor rescue, and venture capitalists' incredible tantrum.” Slate, 13 Mar. 2023, https://slate.com/technology/2023/03/silicon-valley-bank-rescue-venture-capital-calacanis-sacks-ackman-tantrum.html
5. “What is Silicon Valley Bank? The bank’s collapse, explained.” Vox.com, 10 Mar. 2023, https://www.vox.com/technology/23634433/silicon-valley-bank-collapse-silvergate-first-republic-fdic
6. “Bank failures aren’t as uncommon as you think. Here’s what happens when a bank fails and how to know if your money is safe” Fortune, 13 Mar. 2023, https://fortune.com/recommends/banking/what-happens-when-a-bank-fails
7. “How Do Bank Rescues In India Fare Versus The U.S.?” BQ Prime, 14 Mar. 2023, https://www.bqprime.com/opinion/how-do-bank-rescues-in-india-fare-versus-the-us