The Silicon Valley Bank’s Collapse

By Romy S. ’25

Photo source: Financial Times

The Silicon Valley Bank (SVB) was founded in 1983 and specialized in banking for tech startups. At the time of its collapse, it was the 16th biggest bank in America, managing over $200 billion in assets from clients and investments in venture capital. On Friday, less than two days after SVB tried to persuade its customers not to take their money out, the California Department of Financial Protection and Innovation shut it down. How and why did this seemingly successful bank shut down within 48 hours?

Due to the boom of tech companies during the Covid-19 Pandemic, the Silicon Valley Bank’s deposits sky-rocketed from $62 billion in March 2020 to $174 billion in March 2021. Following this increase, SVB bought large quantities of bonds, keeping a small number of deposits on hand in the hope of a large return. Sadly, these long-term bonds fell in value as the interest rates began rising due to inflation. At the same time, clients had been withdrawing money while tech, as a sector, was suffering. In order to be able to pay back these clients, SVB was forced to sell their investments at a low value, losing nearly $2 billion. This forced the bank to raise new money and sell a convertible bond to the public, which can be redeemed for a share or stock in the company. This effort backfired, sending the bank’s clientele into a frenzy and causing a run on the bank, where everyone started taking out their money at once. 

Photo source: PR Newswire

The run on the bank was partly precipitated by Silicon Valley Bank CEO Greg Becker claiming on Thursday that the bank has “ample liquidity to support our clients with one exception: If everyone is telling each other SVB is in trouble, that would be a challenge” (The Information).

The long-term repercussions are numerous: People, businesses, and investors will lose a lot of their money as the federal government only guarantees deposits up to $250,000 per account. Businesses that lost money with SVB will not be able to pay their employees (who then consequently might not be able to pay their mortgages/bills) and might go bankrupt. Investors who lost money with SVB will be less able and willing to fund start-ups. Finally, other banks with similar imbalances between assets and liabilities, like SVB, such as First Republic, might experience a similar “run on the bank.” 

The collapse of SVB could have been avoided by spotting the financial issues earlier, having better risk management of the bank’s assets and liabilities, and managing investor and customer communication. The Treasury has now announced that all deposits above $250K will be guaranteed in a move to restore stability going forward and safeguard depositors’ money. It remains to be seen what the final repercussions of this spectacular failure will be in the coming months.

Categories: News, Science & Tech

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