Silicon Valley Bank, the financial institution famous for its dealings with high-flying tech startups and venture capital, went bust on Friday (10th March,2023) due to an old-school bank run. That's the biggest banking failure since Washington Mutual collapsed during the financial crisis over a decade ago. The effects were felt instantly, with some connected startups desperately trying to pay their staff and worrying they might have to put projects on hold or lay off/furlough employees until they could access their funds.
If you're not familiar, Silicon Valley Bank is a Santa Clara-based lender that specializes in helping startups. Their website says they're the only publicly listed bank exclusively focused on Silicon Valley and IT businesses. They have a big stake in the US startup market, working with more than half of all venture-backed companies and 44% of tech and healthcare firms that went public last year.
What's the deal with this bank failing? Let's break it down and find out why it happened, who it hit hardest, and how it might (or might not) affect the banking system and stock market in the US.
Behind the Fall of Silicon Valley Bank: Unpacking the Reasons for its Failure
Silicon Valley Bank got clobbered by the tech stock slump this past year plus the Fed's super-aggressive plan to hike up interest rates. They'd bought billions in bonds with customers' deposits, which is what banks usually do, and these investments were meant to be safe. But since the bonds paid lower interest than ones issued in today's higher rate environment, their value dropped. Normally not a big deal 'cause banks hold onto them for a long time - unless they have to dump 'em in an emergency.
But Silicon Valley's customers were mostly startups and other tech companies who started needing cash more and more over the past year. Venture Capital funding was drying up and companies couldn't get extra rounds of funding for unprofitable businesses. So they had to tap their existing funds - often deposited with Silicon Valley Bank, which was right in the middle of the tech startup world.
Customers in Silicon Valley started yanking out their deposits and it wasn't a huge deal at first, but they kept asking for more so the bank had to start selling its own stuff off to pay them back. Most of these customers were businesses and loaded people, so they were probably more worried about the bank going under since their deposits were over the $250k limit on deposit insurance. Selling usually safe bonds at a loss added up until the bank was basically broke. They tried finding outside investors to help them out, but no luck.
That fancy tech-focused bank got taken down by the oldest problem in banking: a good ol' run on the bank. Bank regulators had no other option but to seize Silicon Valley Bank's assets to protect what was left of the assets and deposits.
What will happen now?
So, what's gonna happen now? Experts don't think it'll cause any major problems for the banking sector. We did see a dip in crypto on Saturday morning CET, but it looks like it's already bouncing back.
Silicon Valley Bank was big but mainly serviced the tech industry and VC-backed companies, which obviously got hit hard in the last year. Other banks are more spread out across different industries, customers and locations.
Still, if the money at Silicon Valley Bank can't be accessed quickly, there could be some economic ripple effects - especially for US tech startups.
Potential Impacts on Depositors and the Tech Industry
There are still two big problems with Silicon Valley Bank, but they could cause even bigger issues if FDIC doesn't deal with 'em soon.
First up is the bank's huge deposits. The Feds insure deposits up to $250k, but anything above that's uninsured. The FDIC said insured deposits would be available on Monday mornin', but the majority of SVB's deposits were uninsured - not surprising, since its customers are mainly startups and tech millionaires. So right now, all that money's out of reach and it'll probably need to be released gradually. But a lot of businesses can't wait weeks to get their hands on cash for payroll and expenses - so layoffs or furloughs might come into play.
Nope, nobody's buyin' Silicon Valley Bank. Usually, regulators look for a sturdier bank to take on the assets of a failing one, but in this case, no such luck. If someone bought SVB, it'd help sorta fix the money problems startups are facing right now.
Elon Musk expressed his desire to buy SVB on Friday
Elon Musk was totally down with the idea of Twitter buying Silicon Valley Bank when the bank abruptly failed on Friday. People were worried about what could come next week, but Min-Liang Tan, CEO of Razer (they sell gaming computers), suggested that "Twitter should buy SVB and become a digital bank," and Elon tweeted back, "I'm open to the idea."
Final Thoughts
In conclusion, the collapse of Silicon Valley Bank has caused concerns for the tech industry and its customers. While experts don't think it will have a significant impact on the overall banking sector, there are still potential economic ripple effects that could be felt, particularly for US tech startups. Only time will tell what the full extent of the fallout will be for Silicon Valley Bank and its depositors.
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