The Implications of Silicon Valley Bank’s Collapse
The collapse of Silicon Valley Bank (SVB) in March 2023 sent shockwaves through the tech industry.[0] Founded in 1983, SVB specialized in banking for tech startups that were often too risky for more traditional banks.[1] It was the go-to lender for tech startups, and it provided financing for almost half of US venture-backed technology and health care companies.[2] As its name suggests, Silicon Valley Bank was tightly woven into the financial infrastructure of the tech industry, and its failure had far-reaching implications.[2]
SVB’s downfall was caused by a combination of factors. First, it had a lot of deposits from venture capitalists and startups in a single, tightly-knit industry. Low interest rates, easy money and cheap loans meant the tech industry was booming, and SVB was able to benefit from the good times.[3] But when the boom went bust, SVB was hit hard. The bank had also taken on a lot of securities with unrealized losses, and when the Federal Reserve began raising interest rates, the value of these securities fell substantially.[4] At the same time, venture capital started drying up, forcing startups to draw down funds held by SVB.[5] As deposits swelled and customers started yanking money to seek higher yields, the bank quickly became insolvent.[6]
The FDIC provides insurance against deposit losses up to $250,000, but that doesn’t help the large depositors, who may have put in more than that amount.[2] Moreover, the FDIC only has 1% of deposits’ worth of insurance in their fund, making it difficult to prevent against system-wide banking failures.[7]
The collapse of Silicon Valley Bank sparked anxiety among startups around the world, and it was particularly problematic for firms in China that had put all their eggs in one basket after being courted by the California-based lender earlier on.[8] The incident also led to a lot of finger-pointing, with some conservatives claiming that the bank’s diversity programs were to blame.[3] But ultimately, the takeaway from this story is that risk management practices are incredibly important, and that a bank that is too concentrated in its business can be vulnerable to a sudden and dramatic bank run.
0. “The End of Silicon Valley (Bank) – Stratechery by Ben Thompson” Stratechery by Ben Thompson, 13 Mar. 2023, https://stratechery.com/2023/the-death-of-silicon-valley-bank/
1. “Easy Loans, Great Service: Why Silicon Valley Loved Silicon Valley Bank” The Wall Street Journal, 16 Mar. 2023, https://www.wsj.com/articles/easy-loans-great-service-why-silicon-valley-loved-silicon-valley-bank-6b3f203e
2. “What is Silicon Valley Bank? The bank’s collapse, explained.” Vox.com, 10 Mar. 2023, https://www.vox.com/technology/23634433/silicon-valley-bank-collapse-silvergate-first-republic-fdic
3. “Opinion | The Boys Who Cried ‘Woke!’” The New York Times, 14 Mar. 2023, https://www.nytimes.com/2023/03/14/opinion/silicon-valley-bank-republicans-woke.html
4. “Why Investors Should Care About the Banking Scare” Morningstar, 14 Mar. 2023, https://www.morningstar.com/articles/1144082/why-investors-should-care-about-the-banking-scare
5. “How does a bank collapse in 48 hours? A timeline of the SVB fall” CNN, 13 Mar. 2023, https://www.cnn.com/2023/03/11/business/svb-bank-collapse-explainer-timeline/index.html
6. “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
7. “March 2023 Newsletter: A Look at Bank Solvency” Lyn Alden, 13 Mar. 2023, https://www.lynalden.com/march-2023-newsletter/
8. “Getting Money Out of SVB Was Hard—For Chinese Customers, It Was Harder” The Wall Street Journal, 16 Mar. 2023, https://www.wsj.com/articles/getting-money-out-of-svb-was-hardfor-chinese-customers-it-was-harder-75d92827
