The Fall of Silicon Valley Bank: An Inside Look at the Largest Bank Failure Since 2008
Silicon Valley Bank, the 40-year-old institution based in Santa Clara, Calif., catered to nearly half of all U.S. tech startups backed by venture capital. On Thursday, rumblings of a bank run on it began and by Friday it had collapsed, becoming the largest American bank failure since the 2008 financial crisis.
Silicon Valley Bank was founded in 1983 and grew to become 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, and is a banking partner for many venture capital firms that fund those startups. In order to make good on withdrawals, the bank had to sell part of its bond holdings at a steep loss of $1.8 billion, the bank said last week. This announcement spooked the bank's clients, who got worried about SVB's viability, and then proceeded to withdraw even more money from the bank — a textbook definition of a bank run.
When SVB collapsed on Friday, the Federal Deposit Insurance Corporation took control of it. The problem was that SVB was so concentrated in its business that when things got bad for its non-diversified group of clients, it quickly got bad for the bank. Most of SVB’s depositors had more than $250,000 held at the bank, which is above the FDIC’s normal insurance guarantee in case of bank failure, and the Biden administration approved an extraordinary intervention to ensure all depositors at the failed Silicon Valley Bank would have access to all their money.
The incident has sent shock waves across the tech sector, and the FDIC, the Federal Reserve, and the Treasury Department are all taking actions to protect the economy and shore up confidence in the banking system. The Federal Reserve is also opening up a facility to make funding available for other financial institutions, and the U.S. government is guaranteeing all deposits at SVB and Signature Bank.
The narrative of the Silicon Valley Bank incident is simple to follow. Startups and technology companies experienced high levels of profit during the pandemic, some of which they deposited in the Silicon Valley Bank. Flush with their cash, the bank invested a large share into long-dated Treasury bonds that promised good returns when interest rates were low, but when interest rates rose multiple times, the bank was unable to keep up.
0. “What is Silicon Valley Bank? The bank’s collapse, explained.” Vox.com, 12 Mar. 2023, https://www.vox.com/technology/23634433/silicon-valley-bank-collapse-silvergate-first-republic-fdic
1. “Bernie Sanders blames Trump-era policy for Silicon Valley Bank run” Business Insider, 13 Mar. 2023, https://www.businessinsider.com/silicon-valley-bank-bernie-sanders-donald-trump-blame-2023-3
2. “What the Collapse of Signature Bank Means for NY” THE CITY, 13 Mar. 2023, https://www.thecity.nyc/economy/2023/3/13/23638355/signature-bank-collapse-real-estate-ny
3. “Silicon Valley Bank's failure, the government's depositor rescue, and venture capitalists' incredible tantrum.” Slate, 13 Mar. 2023, https://slate.com/technology/2023/03/silicon-valley-bank-rescue-venture-capital-calacanis-sacks-ackman-tantrum.html
4. “After Silicon Valley Bank collapses, plenty of worries over what's next” NPR, 14 Mar. 2023, https://www.npr.org/2023/03/14/1163135286/silicon-valley-bank-collapse-fallout-whats-next
5. “Signature Bank's collapse could deal a blow to cryptocurrency industry” The Washington Post, 13 Mar. 2023, https://www.washingtonpost.com/technology/2023/03/13/signature-bank-collapse-crypto/
6. “Silicon Valley Bank bailout: Did the government just bail out SVB and Signature?” Vox.com, 13 Mar. 2023, https://www.vox.com/money/2023/3/13/23638417/svb-bank-bailout-signature-fed-fdic-treasury-janet-yellen
7. “There’s a deeper story to Silicon Valley Bank’s failure. What can we learn from it?” The Guardian, 13 Mar. 2023, https://www.theguardian.com/commentisfree/2023/mar/13/svb-collapse-2008-financial-crisis