Silicon Valley Bank Failure: What You Need to Know About the SVB Collapse

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Silicon Valley Bank Failure: What You Need to Know About the SVB Collapse

Silicon Valley Bank Collapsed

Silicon Valley Bank Failure: What You Need to Know About the SVB Collapse

Silicon Valley Bank (SVB) focused on investment banking that propels healthcare, life science, and technology companies. It offered financial expertise to innovate founders, investors, and businesses to partner in their growth with a suite of financial services for their businesses. It specializes in startups.

On March 10, 2023, SVB collapsed after a bank run from customers wanting to cash out. It was not prepared to produce funds to pay them. In the end, the federal regulators stepped in and shut SVB down.

SVB is considered the largest bank in the US to fail since the financial crisis in 2008. It was also the second-biggest ever. The bank was a respected and top player in the tech space, having thousands of venture capital-backed startups. But in just one snap, everything changed. So how did SVB go wrong so quickly?

Silicon Valley Overview

Founded in 1983, SVB was the 16th biggest US bank before it collapsed. It specializes in banking and financing for venture-capital-backed startup businesses, primarily tech companies. Tech executives and venture capital firms did business in this bank.

The bank had assets with a total of $209 billion at the end of 2022.

The Role of SVB in the Tech Industry

Silicon Valley Bank provided financing to approximately half of the venture-backed tech companies in the US. The bank was preferred by most tech firms as it supported startup businesses – not all banks accept those startups because of higher risk.

In 2020, the pandemic was a hot market for most tech companies. This is because consumers were willing to spend a huge amount of money on electronics and digital services. While the tech firms had a significant cash influx, the services of SVB were needed by that time to hold their cash dedicated for business expenses, including payroll. As most banks typically do, SVB invested a lot of these deposits.

Silicon Valley Bank Did Not Close; it Failed

SVB failed – this is what people see in the news daily.

The bank could not do what was necessary to keep up in the business. It added around 42 billion in deposits that customers wanted to get out of it. It was considered a run on the bank that caused major stress on the bank. This is why the federal regulators made an action, Treasury Secretary Janel Yellen backstopped the deposits at SVB.

Why Did SVB Collapse?

SVB collapsed for many reasons, including a classic bank run. Many SVB customers simultaneously withdrew their deposits, fearing the solvency of the bank. Most of its depositors were startup companies, and large amounts of cash were deposited since the tech was in high demand during the pandemic.

For a bigger picture, here are the reasons for SVB’s collapse:

Lack of Diversification

SVB invested a significant amount of long-term bank deposits in agency mortgage-backed securities and US treasurers. On the other hand, treasury values and bonds fall as interest rates rise.

In 2022, the Federal Reserve increased the interest rates to combat inflation. And the bond portfolio of SVB began to drop. If the bank held these bonds until their maturity dates, it would have recovered its capital.

Furthermore, the bank initially lends out the money in the short term. But it shifted to long durations securities, like treasures, to yield more. It also did not protect the liabilities with short-term investments to ensure quick liquidations. For several months, the bank was insolvent since it could not liquidate its assets without losing significantly.

As economic factors impact the tech industry, most bank customers decided to withdraw their money because venture capital has begun to dry up. The bank had insufficient cash on hand to liquidate those deposits because of the long-term investments tie-up. Then, it began selling its bonds at a significant loss causing distress to its investors and customers.

In a matter of 48 hours after the sales of assets disclosures, SVB collapsed.

Classic Bank Run

On March 6, 2023, SVB announced its $1.7 billion capital raising. Then, people became anxious, thinking SVB was short on capital.

After that announcement, panic quickly spread on social media accounts, including WhatsApp and Twitter. The bank customers withdrew their money in waves.

On March 7, SVB’s stock plunged by 60%. Many people stated that Twitter fueled the bank run.

On March 8, Californian regulators shut the bank down and put it under the Federal Deposit Insurance Corporation ((FDIC).

SVB’s customers had larger accounts, unlike personal banking. It only took a short moment to diminish the money during the bank run. The snowball effect was caused by the escalating withdrawal paces. Many customers deposited over $250,000 FDIC limit.

Rather than using other accounts, most startups left their money in the primary account of SVB to pay expenditures. In other words, the majority of their working capital was placed in their SVB account, requiring access to their deposits for bills and payroll.

So Far, What Have Regulators Done?

To contain the fallout, regulators have been rushing. The collapse of Silicon Valley Bank and Signature Bank in a matter of three days prompted a quick re-evaluation of the interest rate increases of the Fed.

Prior to the fallout from the two banks’ collapse, the Fed had expected a half-point increase on March 21 to 22.

During the announcement of Signature Bank closure, regulators stated that depositors of SVB and Signature would be made whole no matter how much money they held in their accounts as well as would have full money access by Monday.

President Biden reassured on Monday morning that the deposits of the customers would be available when they needed them and that the financial system in the country was stable.

On Sunday, Secretary Yellen stated that regulators try to stabilize the SVB by working over the weekend. She assured the public that the broader US banking system was well-capitalized and safe. She also acknowledged that most small businesses’ funds were tied up at SVB, and these businesses were counting on them.

She suggested a possible solution: the Silicon Valley Bank acquisition. This emphasizes that regulators try their best to address the situation timely. On Saturday, the FDIC was reported to start an auction for SVB that was set to be completed on Sunday afternoon.

The FDIC also invoked a systematic risk exception on Sunday, allowing the government to repay the uninsured depositors to prevent financial instability or dire consequences for the economy.

On the same day, the Fed made an announcement regarding the emergency lending program set up, with the Treasury’s approval. This is to provide eligible banks with additional funding and ensure they can meet their depositors’ needs.

Who Is Affected by SVB’s Collapse?

Unlike customers, investors and stockholders at Silicon Valley Bank took a massive hit since their investments were not backed by FDIC,

Moreover, another issue is the lack of money from deposits dedicated to payroll and other immediate expenses. Large tech companies, like Roku, Rocket Labs, Roblox, and Etsy, have significant cash in Silicon Valley Bank.

While most banks were insured by the FDIC, the accounts were only insured up to $250,000. This amount is not much because they might spend millions within a month.

How Could SVB’s Collapse Impact the Financial Sector and Small Businesses in the Future?

With the US government guaranteeing the bank, customers’ deposits could subside the immediate panic. SVB customers have expressed their worry about paying their employees. But the financial future and stocks increased by 1% to 2% after the guarantee.

The increasing interest rates and other banks being too invested in plunging bond prices resulted in larger questions. The Fed created the Bank Term Funding, a new program that will provide banks and credit unions with loans for money tied into mortgage-backed securities and US Treasury to meet customer demands. Also, this program is designed to prevent banks from selling their long-term government securities at a loss during economic instability.

However, the biggest concern is the tech sector. Larger tech companies were forced to cut staff after being hit with recessional conditions. One of their largest supporters, Silicon Valley Bank, has collapsed. So, it is expected that startups might encounter funding issues since other banks’ management teams fear taking the risk of the investment.

As with the broader scope, the collapse of Silicon Valley Bank indicates that financial management is critical whether the times are good or bad. Companies also need to be extra cautious about supply chain issues, increasing interest rates, and challenges in raising capital.

First Citizen Bank Purchases SVB

FDIC announced on March 26 that First Citizen Bank would purchase SVB and assume its major loans and deposits. As of March 10, SVB reported almost $199 billion in deposits and $167 billion in assets.

First Citizens Bank is reported to purchase around $72 billion in assets at a $16.5 billion discounted rate. It was also reported that FDIC would have control of about $90 billion in securities and assets in its receivership.

Other Impacts of SVB’s Downfall

When it comes to tech startups, SVB is one of the prominent lenders. But suddenly, it collapsed and caused different impacts.

The Aftermath

The collapse’s fallout has already spread to SVB’s parent company as well as other regional banks. Also, Midsize banks have come under pressure in the middle of worries that they might encounter the same fate.

A Rapid Fall

SVB became the biggest bank in the US to fail since the 2008 financial crisis, struggling under the weight of panicked customers and ill-fated decisions. It was a rapid fall, and the issues are expected to be not yet over.

Deposit Flight

Some businesses decided to yank their money from regional banks and then deposit it with the largest ones. Industry representatives, bank executives, and regulators try to persuade these depositors to stop.

Commercial Real Estate

With the banking crisis happening right now, the commercial real estate lending market is reverberating. There is a fear that banks might pull back or cause a construction activity slowdown that might increase the recession’s likelihood.

Financial Regulations

Currently, the financial regulations are under scrutiny, and the failure of SVB and Signature Bank is one of the contributors.

Are There Other Bank Issues?

The demise of Signature Bank and SVB placed a spotlight on the issues that surround small and midsize banks. These banks tend to focus on niche businesses and become more vulnerable to potential bank runs.

The failure of one bank would scare off other banks’ customers is the most immediate concern. Plus, this failure has proven that bank runs are possible when investors or customers panic and begin pulling their deposits.

On Monday, small banks guaranteed they were in a firmer financial condition to reassure the customers. On the same day, the US regional banks’ shares plummeted as investors attempted to manage the sudden collapse of the two banks.

Conclusion

Amid the collapse of Signature Bank and SVB, experts said that money is safe in the banks as long as there are precautions. People must plan accordingly and ensure to stay within the FDIC insurance limits. It is also recommended to spread out their accounts. Consumers and businesses should ensure all their deposits are well-insured. More and more banks offer additional insurance than FDIC provides.

Customers with multiple accounts have a better chance of diversifying their funds. They can have at least two accounts.

Do you want to learn more about this topic? Are you planning to get real estate financing or a business loan? Feel free to contact GoKapital.

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