In a major shakeup in the financial sector, Silicon Valley Bank, headquartered in Santa Clara, California, was forced to shut down by the California Department of Financial Protection and Innovation in March 2023. The bank’s demise was due to a combination of factors, including the significant decline in the value of its investments and a massive exodus of depositors.
This event comes at a time when the United States economy is already teetering on the brink of a recession and has sent shockwaves throughout the financial world. The downfall of Silicon Valley Bank is particularly noteworthy as it is the largest bank to fail since the 2008 financial crisis when Washington Mutual collapsed.
In this article, we will take a closer look at the history of Silicon Valley Bank, the events that led to its closure, and what implications it may have for depositors and investors.
The Early Days of Silicon Valley Bank
Silicon Valley Bank (SVB) was a prominent commercial bank that operated in California and Massachusetts with branches and offices in 13 additional US states and over a dozen international jurisdictions. SVB Financial Group, which is a publicly traded bank holding company, primarily operated through its bank. SVB was founded in 1983 by Bill Biggerstaff and Robert Medearis, who were former Bank of America managers. The two entrepreneurs came up with the idea of starting a bank to focus on the needs of startup companies during a game of poker.
SVB’s first CEO and president was Roger V. Smith, who previously headed a high-tech lending unit at Wells Fargo. The bank officially launched on October 17, 1983, as a wholly owned subsidiary of Silicon Valley Bancshares, which is now known as SVB Financial Group. The bank started with 100 initial investors and operated its first office on North First Street in San Jose.
The Banks’ History, Strengths and USP
One of SVB’s key strengths was its understanding of the unique needs of startup companies. When the bank was founded, the banking industry lacked an understanding of startups, particularly those without revenue. To mitigate risk, SVB structured its loans based on the understanding that startups would not generate revenue immediately.
Additionally, the bank leveraged its extensive network of venture capital, law, and accounting firms to connect customers to valuable resources. The bank’s main strategy was to collect deposits from businesses financed through venture capital. As these companies matured, SVB expanded its services to offer banking and financing to venture capitalists.
SVB primarily catered to businesses and people in the technology, life science, healthcare, private equity, venture capital, and premium wine industries. The bank’s clients included prominent startups and established companies in Silicon Valley, as well as firms in other parts of the United States and abroad. SVB was also influential among startups in India, where it was unusually willing to serve C corporations whose founders lacked Social Security numbers.
WHY SILICON VALLEY BANK FAILED?
Silicon Valley Bank was once one of the fastest-growing banks in the United States, boasting significant deposits and assets. However, the bank’s downfall began when the Federal Reserve raised interest rates in response to high inflation, causing Silicon Valley Bank’s long-term debt investments to decline in value. Adding to its troubles, many of the bank’s customers, mostly in the tech industry, hit financial troubles and started withdrawing funds from their accounts, prompting the bank to sell some of its investments at a loss to accommodate the withdrawals.
Some experts believe that the bank’s failure began even earlier, with the rollback of the Dodd-Frank Act, which was a significant banking regulation implemented after the 2008 financial crisis. Silicon Valley Bank, being the 16th largest bank in the country, did not have enough assets to be subject to extra oversight and rules when the threshold was increased from $50 billion to $250 billion in the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act.
The bank’s decline happened rapidly over a few days, starting with the announcement of its $1.8 billion loss on its bond portfolio, which resulted in Moody’s downgrading its long-term local currency bank deposit and issuer ratings. The stock for Silicon Valley Bank’s holding company, SVB Financial Group, also crashed, leading to more customer withdrawals totaling $42 billion. Trading for SVB Financial Group stock was halted, and federal regulators took over the bank after failing to find a buyer. Silicon Valley Bank’s parent company, SVB Financial Group, ultimately filed for bankruptcy on March 17.
RESPONSE OF THE FED
In the wake of the Silicon Valley Bank crisis, the Federal Deposit Insurance Corporation (FDIC) has announced that it will insure bank deposits up to $250,000 per depositor per bank for each account category. However, as most accounts held more than $250,000, many depositors stood to lose their funds. To address this, the Federal Reserve invoked a systemic risk exception on March 12, ensuring that all depositors will be reimbursed, even for uninsured funds.
After the collapse of Silicon Valley Bank, President Joe Biden assured the public that immediate action was being taken. He promised that all customers who had deposits in the bank, including small businesses, would be protected and have access to their money. Biden also addressed critics, stating that the money used to protect depositors would come from fees paid by banks and not from taxpayer funds. He further mentioned that the executives running the institution would be fired. With the regulators’ actions, Biden assured Americans that their deposits at SVB would be safe.
While depositors may breathe a sigh of relief, investors are not so lucky. The FDIC can only protect depositors from losses, leaving shareholders and unsecured debt holders at risk. Those who owned stock in SVB Financial Group may not see their investments returned.
Public Reaction against CEO of SVB Bank
Silicon Valley Bank’s collapse has raised many questions about the bank’s leadership and management decisions. According to insiders, the CEO, Greg Becker, made a significant misstep by publicly acknowledging the bank’s financial troubles before securing the necessary support. This move triggered a wave of panic among customers, causing them to withdraw $42 billion in funds within a single day, leading to a negative cash balance of about $958 million for the bank.
Critics have been quick to blame Becker’s judgement and leadership for the situation, while some have questioned why he couldn’t raise the necessary capital privately. Although Becker has reportedly apologized to employees, the impact on the bank’s reputation and the wider tech sector remains to be seen.
Featured Image Credits: Minh Nguyen, CC BY-SA 4.0 via Wikimedia Commons.
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