A Brewing Storm: The Events That led to the SVB Collapse:
On March 8, 2023, SVB reported that it had raised $500 million from General Atlantic and intended to raise an additional $1.25 billion through a common stock sale, as well as $500 million in depository shares.1 This was interpreted as a favourable indication for the bank because it indicated that investors were eager to pour additional capital into the business. However, later that day, Silvergate, a famous bank in the crypto business, announced that it was ceasing operations. This announcement foreshadowed what lay ahead for SVB.
On March 9, when the markets opened, SVB’s stock dropped 30%. The bank’s stock plunged by 60% that day.1 A growing number of venture investors and startups began to withdraw their money from the bank. which added to the downward pressure on the stock.
During a conference video call, SVB CEO Greg Becker asked VCs and startups to “stay calm.” His efforts proved ineffective. By nightfall on March 9, SVB customers had launched $42 billion in withdrawals, resulting in the greatest bank run in history.1
SVB’s huge deposit outflows effectively ended the bank’s share offering. With the bank’s financial situation rapidly deteriorating, the institution became insolvent, prompting the Federal Reserve to intervene and seize it.
The Collapse Goes Public:
Following federal action on March 8, Silicon Valley Bank (SVB) was shut down by California’s financial regulator on March 10.1
The collapse of SVB sent shockwaves through the financial world, prompting investors and experts to rush for clues of other banks experiencing similar issues. The ripple effect was swift, with other institutions feeling the strain of SVB’s demise. With the possibility of a domino effect, the industry was on high alert for any indications of instability. A ripple effect quickly manifested.
Regional lender First Republic Bank’s shares fell as much as 52% in early trading and continued to decline subsequently.2 Only two days following SVB’s demise, New York-based Signature Bank was likewise shut down.
Pandemic Fueled Instability at SVB:
Silicon Valley Bank was doing well just a few years ago. During the 2020 pandemic, SVB’s clientele deposited billions, increasing the bank’s total deposits from $60 billion at the end of the first quarter of 2020 to approximately $200 billion two years later.2
As the funds entered SVB, the company invested in typically secure financial assets such as US Treasuries and mortgage-backed securities. As a result, when the Federal Reserve detected signs of inflation and boosted interest rates, SVB had difficulties. Their earlier investments had lost some of their value, resulting in a hard financial conundrum to solve.
As the epidemic slowed, the Federal Reserve raised interest rates, which had a negative impact on SVB’s clients; startup funding began to dry up as private fundraising got more expensive. SVB’s clients withdrew funds. Eventually, the surge in withdrawals prompted the bank to sell assets (including bonds that had lost value due to interest rate increases), resulting in $1.8 billion in losses.2
Fear Spreads: The Broader Implications for America’s Financial Industry:
The collapse of both SVB and cryptocurrency bank Silvergate on March 15, 2023, has raised concerns about contagion and drawn unsettling parallels to the Great Recession.
While some industry experts are concerned that the convergence of financial systems will cause widespread instability, analysts urge caution, citing the fact that these banks primarily work with cryptocurrency, startups, and venture capital, all of which are more sensitive to interest rate changes. Furthermore, many of today’s banks serve a diverse spectrum of consumers, which may assist them avoid market instability.
Shares of some of the nation’s top banks, including JPMorgan, Wells Fargo, and Citigroup, rose, adding to analysts’ optimism.2
Following SVB’s bankruptcy, President Joe Biden reassured Americans that the financial system and their deposits were safe. He also declared that the government will not seek a taxpayer-funded bailout, setting his administration’s policies apart from the 2008 financial crisis bailout. Another move to calm the storm was the Federal Reserve’s announcement of an emergency lending program to ensure banks could satisfy the needs of their depositors and eliminate the need for institutions to swiftly sell their securities during times of stress.
Close to Home: Implications for Silicon Valley and Tech Startups:
SVB’s bankruptcy has far-reaching consequences for Silicon Valley. Here is why.
SVB had become the preferred bank for tech startups and venture capitalists due to its reputation for understanding the industry’s particular demands and offering finance to companies that regular banks frequently neglect.
SVB held millions of dollars in deposits from a number of high-profile companies, including Rocket Lab, Roku, and AcuityAds Holdings Inc., a Canadian ad-tech startup with more than 90% of its capital in the bank.3 The bank’s failure has had far-reaching consequences, extending from the vineyards of Napa Valley to the busy financial cities of London and Singapore.3
Despite the panic, a group of venture capitalists and entrepreneurs rallied on social media to support the bank. Y Combinator, a startup accelerator that invests in a variety of firms, published a petition calling for a rescue of SVB consumers. Over 100 investment firms have signed onto a letter supporting the bank. Other regional banks, such as San Francisco’s First Republic Bank, have attempted to allay worries.
