The Collapse of Silicon Valley Bank: What Happened & What it Means for the Economy
The Silicon Valley Bank (SVB) collapse is the second-largest failure of a US bank in history, and its significance for the economy cannot be overstated. SVB was an important financial institution for the tech industry, catering to nearly half of all US venture-backed start-ups. As the bank of the global innovation economy, it served 65 percent of existing start-ups and many prominent venture capital firms.
On Wednesday, March 8, SVB’s parent company, SVB Financial Group, announced it had sold $21 billion of assets at a $1.8 billion loss and was going to sell $1.75 billion worth of shares to help plug that hole. The clients of the bank started to worry, causing the bank's stock price to drop drastically. The next evening, people tried to take out $42 billion, which caused the bank to become unable to pay its debts. On Friday, the Federal Deposit Insurance Corporation assumed control of SVB.
The bank was particularly flexible about lending tech startups money even though they didn’t have free cash flow or much in the way of assets. Through providing lines of credit, startups were able to manage temporary dips in cash flow – e.g. when they had to make payments to vendors before receiving payment from customers.
The majority of SVB’s deposits were uninsured, meaning that if the bank failed, those deposits would not be covered by FDIC insurance. This created a risky situation for the bank, as it was highly concentrated in one industry and vulnerable to instability in the tech sector.
The bank’s collapse has been attributed to a range of factors, including the pandemic bull run inflating the value of tech startups and the funds of investors, as well as the bank’s risky investments in long-term government and mortgage securities. Florida Governor Ron DeSantis has also weighed in, blaming the bank’s focus on diversity and politics, which he believes diverted it from its core mission.
The Biden administration approved an extraordinary intervention, stating that all depositors at the failed Silicon Valley Bank would have access to all their money. The Federal Reserve and the Treasury Department also said that banks facing similar situations—having to sell Treasury securities to meet deposits—could instead borrow from the Fed using the Treasury securities as collateral.
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