It's been four decades since the Silicon Valley Bank was created, and in that time, it's grown to become the 16th largest bank in the US. However, it all came crashing down in just a day and a half - the second-biggest bank failure in US history.
SVB's dramatic collapse was a significant shock to the tech industry, sparking the closure of other banks and rattling global markets. The fallout from the collapse threatened the livelihoods of startups across the country, leaving many scrambling to find new funding sources.
What went wrong for Silicon Valley Bank?
In 1983, the bank opened its doors to serve fledgling tech companies. Many of the country's venture capital-backed technology and life sciences companies came to rely on SVB, including Roku and ROBLOX. The pandemic increased the number of loan defaults, and the economic recession caused many companies to pull their investments.
The bank's clients can be classified into two categories: those that move quickly and their money scurries. The non-risky clients are companies that move slowly, and their cash moves gradually.
The Dodd-Frank Act was signed into law by President Barack Obama in 2010 in response to the Great Recession, caused in part by the collapse of the subprime mortgage market. The act imposes stricter regulations on banks like SVB, including rules designed to prevent another financial crisis.
During the Trump administration, some of those regulations on smaller banks were rolled back. This was done to liberate small banks from excessive bureaucracy preventing them from reaching their full potential. Some rules were reversed for banks with less than $250 billion in assets. So you have the most prominent banks like Bank of America and Chase, but the ones that are a step below have looser restrictions. This change has helped to encourage growth and development within the smaller banks.
SVB had a record year in 2021, with deposits tripling in just two years to reach $189 billion. This surge in cash was primarily due to businesses depositing more money during the pandemic. With such a substantial cash inflow, SVB is poised for even more success in the coming years.
SVB Financial's core business is doing well, so they took that cash and bought US treasuries and government-backed mortgage securities. These products are usually considered safe investments, but with the current market conditions, banks are looking for ways to earn income from them.
SVB's securities portfolio rose about a hundred billion dollars in under a year. Interest rates rose after SVB stockpiled that hundred billion dollars in bonds. This caused bond prices to fall, and banks were sitting on losses. The federal funds rate target range is anticipated to continue rising, which will mean ongoing losses for SVB and other banks invested in bonds.
SVB had invested heavily in subprime mortgage-backed securities and other high-risk debt instruments in the early 2000s. By 2007, the value of these investments had fallen sharply, leaving SVB with a massive paper loss. This "gap" between the value of SVB's assets and what it had paid for them was the critical risk that eventually led to the bank's downfall.
Interest rates have increased, and new deposits have been shrinking. New deposits fell nearly $30 billion in December from the March total. This has made the situation worse for those who are already struggling.
Talking about the end of 2022
Most of the bank's deposits were held in just 37,000 accounts with over $250,000. The amount insured by the FDIC. Given that most of the bank's deposits were in these large accounts, the loss of even a few of them could significantly impact the bank. So, when SVB announced in a regulatory filing on March 8th that it had sold a large chunk of securities at a loss of about $1.8 billion to help cover a decline in deposits, the market reaction was pretty adverse. The stock fell on the news, indicating investors were worried about the bank's health.
And investors were already on edge. So when crypto-focused bank Silvergate announced it would wind down and return all deposits, startup CEOs began receiving urgent calls from panicked venture capital investors. This caused many to believe that the bottom was about to fall out.
He was breathless, like he had just run a marathon, and said, “Take your money out of SVB. Go into your account, and take your money out as soon as possible.”
The cascade of withdrawals began as a trickle but quickly turned into a tsunami as news traveled across the valley. An increasing number of startups pulled their cash, causing a run on the bank. This spelled the end for SVB.
The bank's stock took a severe hit the following day as customers attempted to withdraw $42 billion in deposits. This caused great panic among investors and the general public.
SVB ran out of cash.
People are suddenly saying that this bank is risky. The bank has enough money to cover deposits if people withdraw their cash peacefully and orderly, but it only has enough if everyone tries to withdraw their money simultaneously.
On that day, the regulators seized the bank. The FDIC said in an official statement that customers would have full access to their insured deposits within three days. However, the bank had more than $151 billion worth of deposits at the end of 2022 that needed to be insured. These deposits exceeded the $250,000 limit. Two days after SVB's collapse, a second bank with a different set of problems, Signature, failed and was seized by regulators.
The third-largest failure in history.
Now that people are worrying about other banks, it's becoming a panic. Federal officials, state officials, and everyone else are in a difficult position to make people confident in the banking industry.
On Sunday, March 12th, US regulators announced that uninsured deposits over $250,000 from the two banks would be covered. On Monday, March 14th, Signature told clients that all deposits were not at risk due to the US Treasury and FDIC announcements. SVB's focus on Silicon Valley made it uniquely vulnerable to a run on the bank, but these recent announcements have alleviated any concerns about deposits.
This company's success has always been linked to one industry in particular. However, this industry is unstable, and its deposits often must be corrected. This makes it difficult for the company to raise its short-term funding to support its long-term investments and bonds.
Now President Joe Biden is blaming the Dodd-Frank Act rollback for the failures. "I'm gonna ask Congress and the banking regulators to strengthen the rules for banks, to make it less likely this kind of bank failure would happen again," said Biden.
The investigations into SVB are underway, and the bank's clients will see their money returned. However, shareholders are out of luck as the Treasury Secretary said, "we're not going to do that again." The focus is on trying to meet the needs of the depositors.
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