What is Silicon Valley Bank and why did it suddenly collapse?

It used to be that you had to physically go to a bank to withdraw your money — or at least take the psychic damage of picking up a telephone. In this case, digitalization meant that the money went out so fast that Silicon Valley Bank was essentially helpless, points out Samir Kaji, CEO of investing platform Allocate. Customers tried to withdraw $42 billion in deposits on March 9th alone — a quarter of the bank’s total deposits on a single day. It’s got a bunch of assets that are worth less money if interest rates go up. And it also banks startups, which are more plentiful when interest rates are low. Essentially, these bankers managed to put themselves in double trouble, something a few short-sellers noticed (Pity the shorts! Despite being right, they’re also fucked because it’ll be hard to collect their winnings).

SVB proprietary data and insights from discussions in-market shed light on how private equity and venture capital professionals are adapting to higher interest rates, tighter liquidity, and slower fundraising. And because of all these liquidity events — congrats, btw — no one needed a loan because they had all this cash. So, as explained in more detail by Bloomberg’s Matt Levine, Silicon Valley Bank bought government securities. This was a fine and steady way for SVB to make money, but it also meant it was vulnerable if interest rates rose. There are lots of people who are wondering if their next paycheck will be disrupted.

Are Credit Unions Safer Than Banks?

In recent months, the sector has been cutting staff as economic conditions deteriorate. At a time they need financial backing, one of its biggest supporters has collapsed. The longer term questions is whether SVB’s vulnerability to rising interest rates is paralleled in other banks through an over-exposure to falling bond prices. Unlike a retail bank that caters for business and households, SVB’s clients tended to have much larger accounts. Given banks only keep a portion of their assets as cash, they are susceptible to a rush of demand from customers. But bonds have an inverse relationship with interest rates; when rates rise, bond prices fall.

A third of Y Combinator companies won’t be able to make payroll in the next 30 days, according to YC CEO Garry Tan. An unexpected mass furlough or layoff is a nightmare for most companies — after all, you can’t make sales if the salesforce isn’t coming into the office. While Moshirian says he doesn’t think the banking system is about to unravel, he notes that people also initially felt that the sub-prime mortgage crisis was contained. Governments and regulators around the world, including in the UK and Australia, are checking for SVB exposure in their corporate and banking sectors. Immediate concerns of widespread contagion have been contained by the US government’s quick response in guaranteeing all deposits of the banks customers. While SVB’s problems stem from its earlier investment decisions, the run was triggered on 8 March, when it announced a $1.75bn capital raising.

1. It turns out Becker also sold $3.6 million of shares in Silicon Valley Bank’s parent company on February 27th.
2. If you’re not familiar with this seemingly regional bank, nobody’s blaming you.
3. It means customers at SVB will be able to access all their money on Monday morning.
4. Silicon Valley Bank (SVB) was shut down in March 2023 by the California Department of Financial Protection and Innovation.
5. Those once-safe investments looked a lot less attractive as newer government bonds kicked off more interest.

SVB’s failure didn’t have anything directly to do with the ongoing crypto meltdown, but it could potentially worsen that crisis, too. Crypto firm Circle operates a stablecoin, USDC, that’s backed https://www.forexbox.info/ with cash reserves — $3.3 billion of which are stuck at Silicon Valley Bank. That stablecoin should always be worth $1, but it broke its peg after SVB failed, dropping as low as 87 cents.

The swift collapse of Silicon Valley Bank, explained

Instead of setting the threshold at $50 billion, the 2018 law increased it to $250 billion. By Thursday morning, SVB shares began to see https://www.currency-trading.org/ a massive sell-off. At Vox, we believe that clarity is power, and that power shouldn’t only be available to those who can afford to pay.

The FDIC said it is now working to determine what portion of SVB deposits are insured to its $250,000 limits. If you have a loan with the bank, you still need to make your payments. That’s in large part because the tech startup world is tightly plugged into itself, with https://www.topforexnews.org/ founders and executives constantly trading information and boasting on Twitter or text chains or Signal chats. One tech company pulling its money out of a bank is a story that quickly cascades to the leaders of other companies, who then tell leaders of other companies.

What does this mean for the banking system, and just how worried should I be about my bank?

Union Square Ventures and Coatue Management, among others, decided to tell companies to pull their money, too. So if you are, let’s say, a bank specializing in startups, do you know what ZIRP world does to you? Well, my children, according to the most recent annual filing from SVB, bank deposits grew as IPOs, SPACs, VC investment and so on went on at a frenetic pace. President Joe Biden commented on the situation in an attempt to reassure the public, saying the Silicon Valley Bank funds would still “be there when you need them” without requiring a taxpayer-funded bailout. The money being used doesn’t come from taxes, instead, it’s from insurance premiums paid by banks, and interest earned on money invested in US government obligations, according to the FDIC.

O’Donnell says he told his portfolio companies to do the same. He says about a third of the 60-odd companies in his portfolio used SVB, and that by the end of Thursday, all except one had pulled their funds. “Big Short” investor Michael Burry likened SVB’s collapse to that of scandal-ridden Enron, while hedge fund billionaire Bill Ackman suggested the federal government should bail out the bank. The FDIC formally took control of its assets on Friday after the bank was shut down by the California Department of Financial Protection and Innovation. Silicon Valley Bank was a favorite lender among tech startups prior to its downfall.

It went public in 1988 and, in 1989, moved to Menlo Park in an effort to cement its presence in the venture capital world. Once Silicon Valley revealed its huge loss on Wednesday, the tech industry panicked, and start-ups rushed to pull out their money, resulting in a bank run. The move caused a wider sell-off in stocks and sparked fears that other banks may be at risk of failure. Silicon Valley Bank, one of the leading lenders to the tech sector, was shut down by regulators Friday over concerns about its solvency.

The bank also would get slices of companies as part of its credit terms. That meant it made $13.9 million on FitBit’s IPO, for instance. More recently, Coinbase’s IPO paperwork revealed that Silicon Valley Bank had the right to buy more than 400,000 shares for about $1 a share. Coinbase’s shares closed at a price of $328.28 the first day it was listed.

Though boring by Silicon Valley’s usual standards and little-known outside business circles, the bank played a critical role in supporting the tech sector during its recent boom in valuations. On Monday, the Wall Street Journal reported that FDIC officials told senators they planned to try to auction the failed bank again. According to the WSJ, declaring the bank’s failure “ a threat to the financial system” now allows for some extra flexibility that wasn’t there before.

But as the Federal Reserve increased interest rates in response to high inflation, Silicon Valley Bank’s bonds became riskier investments. Because investors could buy bonds at higher interest rates, Silicon Valley Bank’s bonds declined in value. According to the FDIC, this is the second-largest bank failure in U.S. history, behind the collapse of Washington Mutual in September 2008. By noon Friday, California state and federal banking regulators had seen enough and announced they were taking over SVB’s deposits and putting the bank into receivership. That funding, the announcement said, will come from loans from the newly created Bank Term Funding Program. Beyond tech, this caused some shakiness across the banking industry, especially regional banks, amid concerns that other banks could be in trouble or that contagion could set in.