The Collapse of Silicon Valley Bank and Its Implications
On March 17, 2023, Silicon Valley Bank (SVB) collapsed. The bank, which had assets totaling $209 billion at the end of 2022, according to the Federal Deposit Insurance Corporation (FDIC), was a major lender to venture-backed technology and healthcare companies in the US. Its hyperconnected network of customers meant that a bank run could happen quickly, and it had invested in Treasury bonds with long-term maturities and the Federal Reserve raised interest rates, further decreasing its value.
The collapse of SVB, and the subsequent decision by the US Treasury Department to provide bailout money, raises key questions about the structure of the financial system and who the government protects during times of crisis. A bailout is when a business, individual, or government provides money and/or resources to a failing company, and is designed to prevent the consequences of bankruptcy or default on financial obligations.
While the debate on whether the SVB bailout was a legitimate bailout or not can be chalked up to semantics, it is important to recognize the benefits of specialization that allowed SVB to become such a force in the startup industry. SVB had products and services tailored to the needs of the startup community, and it had deep relationships with both VCs and companies that could be a source of important networking opportunities for entrepreneurs and investors alike.
In order to preserve the benefits of SVB’s specialization, the least disruptive solution and the one that would keep most of the benefits of SVB’s specialization in place would be to sell the bank in its entirety and to have the bank continue offering the kinds of services it historically provided, albeit with a much less risky balance sheet.
The FDIC insures most banks up to $250,000, but SVB had multiple accounts above that threshold. Under the Treasury Department plan, bank customers won’t lose any of their deposits, including those that exceed the FDIC limit. Moreover, it is easy to acquire insurance on much more than $250,000 by simply keeping money at more than one bank.
To prevent future collapses, the US government has established the Bank Term Funding Program (BTFP) to offer eligible banks loans for up to a year against US Treasuries and other assets at their original value. This move will help to protect against any financial contagion from spreading to other banks.
0. “Silicon Valley Bank's Focus on Startups Was a Double-Edged Sword” HBR.org Daily, 17 Mar. 2023, https://hbr.org/2023/03/silicon-valley-banks-focus-on-startups-was-a-double-edged-sword
1. “Silicon Valley Bank: What happened before the collapse” NPR, 15 Mar. 2023, https://www.npr.org/2023/03/15/1163269781/silicon-valley-bank-svb-collapse-history
2. “If It Looks Like a Bailout and Walks Like a Bailout It’s Probably a Bailout” SchiffGold, 16 Mar. 2023, https://schiffgold.com/commentaries/if-it-looks-like-a-bailout-and-walks-like-a-bailout-its-probably-a-bailout/
3. “Bank failures conjure up the dreaded ‘b-word': Bailout” CNN, 15 Mar. 2023, https://www.cnn.com/2023/03/15/business/bailout-silicon-valley-bank-signature/index.html