Step back to the early days of Silicon Valley, where a small and obscure regional bank was quietly chugging along, unknown to the outside world. Yet, as the tech industry began to blossom and flourish, this bank, known as Silicon Valley Bank (SVB), rose to become a powerhouse in the tech ecosystem, catalysing innovation and fueling the growth of countless start-ups with its tailored banking services.
Fast forward to March of 2023, and SVB is facing a crisis that would send shockwaves through the tech and startup world. It all started with a severe liquidity crisis, which led to a bank run, with customers attempting to withdraw US$42 billion in deposits in a single day. It was the kind of thing that people only read about in history books, but now it was happening in real life.
Investors and portfolio companies were scrambling to pull out their funds, as the collapse of SVB represented a significant blow to the tech industry and the innovation economy. SVB had been a key provider of funding to the startup ecosystem, and its demise threatened to disrupt the flow of capital to innovative companies.
The collapse of SVB was a stunning reminder of the current fragility of the financial system and the dangers of overreliance on a few key players. It also highlights the importance of risk management and diversification, as well as the need for regulatory oversight to prevent similar events from happening in the future.
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Silicon Valley Bank cracks begin to show
During the COVID-19 pandemic, SVB saw a surge in deposits from these tech companies, as people relied on their services for entertainment and delivery while stuck at home. The pandemic was a challenging time for everyone, but the tech industry seemed to be thriving. People were using technology more than ever before, and SVB was there to help these companies grow and succeed.
SVB invested a large portion of these deposits into what they thought was one of the safest types of investment: US government bonds. After all, these bonds were considered low-risk and stable, providing a reliable source of income. But trouble came knocking when the US Federal Reserve started raising interest rates in response to inflation. The value of SVB’s bonds began to fall, and economic conditions for the tech sector started to decline after the pandemic boom.
To raise the necessary liquidity, SVB sold $21 billion of securities, resulting in an after-tax loss of $1.8 billion. It also came up with a plan to sell $2.2 billion in shares to help shore itself up. However, Moody’s downgraded the bank’s credit rating, which spooked investors even further.
Adding to the turmoil was the collapse of another bank called Silvergate, which had gone under for crypto-related reasons. This event made investors even more nervous, and when SVB made its announcement on March 8th, many people jumped ship. Experts pointed to a rookie mistake in interest-rate-risk management, as SVB had invested short-term deposits into long-term bonds. This same phenomenon wiped out the US savings and loan industry in the 1980s.
SVB’s downfall was a stark lesson in the importance of diversifying assets. Catering to a particular clientele, especially one as volatile as the tech industry, left SVB vulnerable to taking a hit when economic conditions changed. As Campbell R Harvey, a professor at Duke University’s Fuqua School of Business put it, “Your loan book needs to be diversified.”
The impact on the tech industry
In response to the collapse, the FDIC created a new entity, the Deposit Insurance National Bank of Santa Clara, for all insured deposits for Silicon Valley Bank. People who have uninsured deposits will be paid an advanced dividend and get a little certificate, but that isn’t a guarantee people will get all their money back.
Another option for the FDIC is to recover SVB’s assets is through the sale of the bank’s assets, such as loans and securities. However, this approach could take longer and may result in lower recoveries for the depositors.
The collapse of SVB sent shockwaves through the tech and startup world. The bank had been a key player in the Silicon Valley ecosystem for decades. Its close ties to the venture capital industry had made it a trusted partner for investors seeking to fund innovative new businesses.
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Startups that relied on SVB for funding were left scrambling to find new sources of capital, while investors struggled to find a replacement for the bank’s unique blend of expertise and financial support.
Despite the turmoil, the tech industry remains resilient. In the wake of SVB’s collapse, new players are likely to emerge, offering innovative solutions to the funding challenges facing startups and technology companies. The FDIC’s swift response to the crisis also helped to prevent a wider systemic risk, demonstrating the importance of regulatory oversight and intervention in times of crisis.