- By Yash Sharma
Silicon Valley Bank (SVB) was a prominent bank based in Santa Clara, California, known for its focus on serving the technology, life sciences, and venture capital industries.
However, it's important to note that the financial landscape can change rapidly, and unforeseen events or circumstances can impact any institution. Banks can face challenges due to various factors, including economic downturns, financial mismanagement, regulatory issues, or significant loan defaults.
We'll delve a little deeper into the story of the bank, the circumstances leading up to the collapse, and what it implies for depositors, investors, and the economy at large to help comprehend just what went wrong with Silicon Valley Bank.
What Was Silicon Valley Bank?
As a division of SVB Financial Group, Silicon Valley Bank (SVB) was the 16th-largest bank in the country. In December 2022, the bank had assets of around $209 billion.
Silicon Valley Bank offered commercial banking services to businesses of all sizes, but it was renowned for supporting start-ups and venture-backed budding organizations. The Bank's clients participated in 44% of the venture-backed initial public offerings (IPOs) in the technology and healthcare sectors in 2022, according to the data available on the company's website.
Why Did Silicon Valley Bank Fail?
Between 2019 and 2022, Silicon Valley Bank had stupendous business expansion, which left it with a sizable number of deposits and assets. A tiny portion of those deposits were kept in cash, but the majority were utilized to purchase Treasury bonds and other long-term assets. These investments often have minimal risk levels and low returns.
But as the Federal Reserve hiked interest rates in response to rising inflation, Silicon Valley bank bonds became riskier assets. Silicon Valley Bank's bonds have fallen in value as investors have been able to buy bonds at higher interest rates.
On the other hand, some of Silicon Valley Bank's customers, pre-dominantly in the tech industry, ran into financial trouble, and many began withdrawing money from their accounts. To deal with these large withdrawals, Silicon Valley Bank decided to sell off some of its investments, but the sale was loss-making. SVB lost it’s $1.8 billion and that was the beginning for end of the bank.
In a report released on April 28, 2023, the Federal Reserve Board formally accused SVB's management of mismanaging the investment risk of its balance sheet and the board's neglect of its duty to oversee management and was condemned. In addition, the Fed noted the bank's failure to recognize vulnerabilities in the bank's rapid growth over 2019-2021 and the significant issues it identified related to risk management prior to confirming the bank's failure. It also blamed its own regulators for failing to act.
A Timeline of the Collapse
March 8: Silicon Valley Bank announced its $1.8 billion loss on its bond portfolio
March 9: Shares of Silicon Valley bank holding company SVB Financial Group plunged at the opening. Other major banks were also hit by slumping stock prices.
March 10: Trading in SVB Financial Group shares were suspended. That day, before the bank opened, federal regulators announced they would take over the bank.
March 12: Following the Silicon Valley bank failures, federal regulators have announced emergency measures to allow customers to recover all their money, even uninsured.
March 17: Silicon Valley Bank's parent company, SVB Financial Group, filed for bankruptcy.
Impact on Depositors and Investors
The FDIC guarantees bank deposits of up to $250,000 per depositor, per bank/account category-21. In other words, if you had $250,000 in your Silicon Valley bank account, you would get the complete amount back.
Unfortunately, most Silicon Valley bank accounts had more than $250,000 in deposits, most of which were uninsured. In most cases, this means that the account holder loses money in excess of that threshold.
The Bottom Line
The failure of the Silicon Valley Bank in March 2023 will be one of the prominent bank failures since the 2008 financial crisis, and given that recession fears are already looming, the failure will further undermine consumer confidence in the economy. The bank’s failure is a reminder that there exists many weak areas in the banking system, such as the lack of supervision of banks with less than $250 billion in assets.
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