Collapse of Silicon Valley Bank: What Caused It and What It Means for the Banking Sector
On Friday, Silicon Valley Bank, a major lender to many of the world’s most powerful tech investors, collapsed and was taken over by federal regulators, becoming the largest US bank to fail since the 2008 global financial crisis. So, what caused the collapse of Silicon Valley Bank and what could it mean for the banking sector?
Silicon Valley Bank was founded in 1983 in Santa Clara, California, and quickly became the bank for the burgeoning tech sector there and the people who financed it. The bank itself claimed to bank for nearly half of all US venture-backed startups as of 2021, making it a vital part of the financial infrastructure of the tech industry.
The bank's collapse came out of a panic and a bad bet on interest rates, but it got into this situation because of its concentration in a single, tightly-knit industry. SVB catered to venture capital and private equity, and as the sector had done well over the past decade, so had SVB. Due to the bank's high concentration in one industry, it was exposed to a great deal of risk. When difficulties arose for the bank's customers who were not diversified, the bank itself soon experienced difficulties.
The bank was also known for its flexibility when it came to lending to tech startups, offering loans, or “venture debt,” to startups that had secured venture capital but might not qualify for conventional bank financing. It also offered lines of credit, which allowed startups to cover dips in cash flow.
When the Federal Reserve raised interest rates seven times in 2022, the value of the Silicon Valley Bank’s holdings of Treasury bonds plummeted because newer bonds paid more interest. As interest rates rose, the gusher of venture capital funding to startup and tech companies slowed, and tech companies had to withdraw more of their money from the bank to meet their payrolls and other expenses.
SVB was covered by the Federal Deposit Insurance Corporation (FDIC), but over 90% of deposits exceeded the $250,000 limit for federal insurance on bank accounts. The Fed’s policy for depositors at SVB has pledged to cover uninsured deposits to prevent widespread financial collapse.
The collapse of Silicon Valley Bank has raised concerns about the banking sector as a whole, with shares of all kinds of lenders, including the big banks, sagging since last week.
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