Regulators closed Silicon Valley Bank (SVB) on March 10, making it the most significant US bank failure since the late 2000s’ Global Financial Crisis— and the second-largest in American history. Signature Bank was closed on March 12 by state regulators in New York, followed by the Swiss National Bank’s facilitation of Credit Suisse’s acquisition by UBS, Switzerland’s largest bank, on March 19.
Silicon Valley Bank’s downfall was like a scene straight out of a Hollywood blockbuster. The California Department of Financial Protection and Innovation slammed the gavel on the struggling bank in March 2023, as its investments took a nose-dive and depositors rushed to withdraw their hard-earned cash.
Enter First Citizens Bank, who swooped in and saved the day by buying up all deposits and loans. However, this wasn’t just any run-of-the-mill bank failure. This was the biggest crash since Washington Mutual’s demise during the financial crisis of 2008. Cue the ominous music.
With over 550 bank closures in the past two decades, it’s not exactly a rare occurrence. But what’s the real reason behind Silicon Valley Bank’s meltdown? Let’s take a closer look at the bank’s history, the events leading up to the collapse, and what it means for anyone with a stake in the game. Hold onto your seats, folks. This is about to get interesting.
First, some background on exactly what’s going on in the banking world right now. Allow me to paint you a picture. I promise it will be a masterpiece.
It All Started in Europe
Although some regional banks only recently grabbed the spotlight for their financial woes, Credit Suisse had been signaling concern for quite some time. Even before UBS scooped up Credit Suisse in a $3.1 billion deal, Switzerland’s then-second largest bank had faced a deluge of scandals. More recently, a volatile combination of frequent management shuffles, staggering investment losses, regulatory shifts, and heightened challenges for banks led Credit Suisse to the verge of collapse.
After SVB’s failure, increased scrutiny on banks set the stage for the tipping point of Credit Suisse. Just before UBS acquired the struggling Swiss bank, its largest investor—the Saudi National Bank—refused to inject much-needed cash into the firm.
What About The Regional Banks?
The collapse of SVB resulted from several factors. Despite offering relatively high rates on deposits to attract clients, it bought longer-term, higher-yielding bonds when it was cash rich, leading to big investment losses as interest rates rose. It also had lower levels of deposits on hand and invested a greater percentage of its capital than most other banks, causing it to be on looser footing. Furthermore, speculation arose that SVB had relaxed its lending standards, which led to a deterioration in the quality of loans to some riskier venture-backed companies.
After SVB announced losing $1.8 billion in asset sales, it failed to secure additional investment capital, and many customers withdrew deposits, resulting in regulatory seizure.
Signature Bank faced a similar collapse due to its client base similarly rushing to withdraw funds after SVB’s failure.
Initially, unclear about what might happen to depositors with more than the standard FDIC insurance limit, the Fed, FDIC, and Treasury granted depositors access to all their money starting March 13.
A Timeline Leading up to the Crash
Silicon Valley Bank was established in 1983, after being conceptualized by Bill Biggerstaff and Robert Medearis over a game of poker, as outlined in the bank’s own history from 2003. Their goal was to offer banking services to tech startups in Silicon Valley with their first office being situated in San Jose.
Fast forward to four years later, in 1987, Silicon Valley Bank was trading stock on Nasdaq. By 1988, they completed the IPO and raised $6 million in equity. This was a significant achievement driven by their trailblazing focus on tech. The bank continued expanding its presence, starting with the East Coast, Massachusetts, in 1990, and by the 90s, the company had opened offices all over the USA.
Silicon Valley Bank’s history is a testament to its resilience. Despite having backed young tech startups during the dot-com bubble of the ’90s, the bank narrowly avoided disaster when the bubble burst, and SVB’s stock fell more than 50% in 2001, according to a 2015 report by The New York Times.
SVB expanded to open an office in Israel in 2008, a branch in the U.K. and a joint venture in China in 2012, with other offices sprouting up in Europe and Canada during the last decade. The bank’s connection to California wine appears to have played a part in building its brand and gaining trust with Silicon Valley entrepreneurs. In 2015, SVB’s wine practice accounted for 6% of the bank’s $14.6 billion gross loan portfolio. As of Dec. 31, 2022, SVB held a whopping $209 billion in assets and $175 billion in deposits, boasting of banking 44% of U.S. venture-backed technology and healthcare IPOs. Although among the top 20 largest banks in the country, SVB was not always regarded as a “typical” bank like Wells Fargo or Chase, although it has been around as long as the organized venture capital community in Silicon Valley.
What Made SVB So Popular?
Silicon Valley Bank (SVB) was not like traditional banks – they had several key differences.
First, SVB was fully focused on the innovation economy, offering specialized banking services and resources for startups, entrepreneurs, and investors in industries such as technology, life science, and healthcare. They understood the unique needs of these industries and supported them to succeed.
Second, SVB strived to create a culture of innovation and entrepreneurship. With an emphasis on creativity, risk-taking, and collaboration, SVB built close relationships with their clients.
Finally, SVB took a relationship-based approach to banking. They built long-term partnerships with their clients by investing time to understand their business needs. Thanks to this approach, SVB enjoyed high customer satisfaction and low churn rates. Until the obvious happened, of course.
Silicon Valley Bank Q&A
Question: Just how large was SVB?
Answer: Venture capitalists were pouring big bucks into numerous startups, with SVB as their conduit. However, despite having over $200 billion in assets, SVB floundered – making it the most massive bank to fail since the Great Recession and one of the largest to ever fail in the US.
Question: What happened to SVB?
Answer: The downfall of Silicon Valley Bank occurred due to a bank run. On March 8, SVB Financial Group, the parent company of SVB, disclosed a $2.25 billion share sale following a $2 billion loss from selling $21 billion of securities from its portfolio to strengthen the balance sheet. However, this decision alarmed its clients and disrupted the market, causing a sharp decline in SVB Financial’s share price the following day.
Trading of the stock was suspended by Friday morning, and rumors abounded that SVB was in talks for a possible sale. Prominent VCs, including Peter Thiel and Union Square Ventures, advised their companies to withdraw their investments from the bank, leading to escalating panic.
As Alexander Yokum, a banking expert at CFRA Research noted, “People started freaking out, and unfortunately, it would appear rightly so.” Regulators ultimately shut down the bank around midday Friday. —Emily Stewart
Question: How Is It Possible That This Happened so Fast?
Answer: SVB’s difficulty stems from being overexposed to its primary clientele – venture capital and private equity firms. As long as that industry flourished, so did the bank. However, such a heavy reliance on one sector is inherently risky, and when issues arose for its non-diverse clientele, it became a struggle for the bank.
Unfortunately, other external factors aggravated the situation. For instance, Silvergate – a bank that heavily focused on cryptocurrency – announced its intention to shut down around the same period. Additionally, news about SVB’s struggles caused other stakeholders to panic.
Question: How Does This Affect the Overall Banking Industry?
Answer: In the grand scheme of things, the banking industry appears to be in relatively stable condition. Even if everyone didn’t panic simultaneously, SVB would likely have weathered the storm. Nevertheless, the aftermath of SVB’s downfall is less than ideal, particularly for those who will bear the brunt of the fallout. Yet, concerns persist about the physical well-being of the broader banking system.
Question: Should You Be Worried About Your Money?
Answer: When it comes to keeping cash safe, don’t go stashing it under your mattress just yet. With up to $250,000 of bank deposits being insured by the federal government, you can breathe a little easier, as long as your dough doesn’t exceed that amount.
Question: Did SVB Collapse so Quickly Because It Was Tied to Tech?
Answer: It may appear so because the tech startup world operates in a closely-knit circle where founders and executives are always exchanging information and boasting on Twitter, text chains or Signal chats. Whenever a tech company decides to withdraw its funds from a bank, the story spreads quickly to leaders of other companies. Moreover, it’s not just tech founders talking to themselves. On March 9, a group of venture capitalists actively advised their portfolio companies to pull their money out of SVB.
Question: What Does This Mean for Tech Companies?
Answer: As tech companies struggle to retrieve their funds from SVB, many are left wondering: what happens when it comes time to compensate employees? Although the FDIC guarantees deposits up to $250,000, for larger companies, that sum is insufficient. This predicament is why the FDIC’s decision to cover the entire deposit amount is groundbreaking.
Question: What Is FDIC Insurance, and How Does It Work?
Answer: The Federal Deposit Insurance Corporation was established in response to the Great Depression’s widespread bank failures, which resulted in many customers losing their money. Its purpose is to protect consumers who use American banks and provide stability to the American banking system. If a member bank fails, its deposits – the money you’ve put in the bank – are insured for up to $250,000. Anything beyond that, and there’s no guarantee you’ll ever see it again. However, the system has evolved. In the wake of SVB’s failure, the Federal Reserve Board, Department of the Treasury, and the FDIC announced their plan to reimburse depositors in full. Additional funding will be made available to eligible depository institutions, sourced from loans through the newly created Bank Term Funding Program.