Collapse of Silicon Valley Bank Leaves Tech Startups Scrambling
By Silicon Valley Bank, the fabled “bank of the global innovation economy,” has collapsed, leaving tech startups scrambling for answers.[0] Founded in 1983 by a group of venture capitalists over a poker game, Silicon Valley Bank provided financing for almost half of US venture-backed technology and health care companies. Its high-risk, high-reward model proved to be its undoing, as the tech sector’s struggles in 2023 and a subsequent bank run led to its collapse.
The bank was particularly exposed to instability in the tech sector, as it claimed to bank for “nearly half of all US venture-backed start-ups” and it worked closely with many venture capital firms. Though Silicon Valley Bank had a significant number of large and uninsured depositors, with accounts totaling more than the up to $250,000 guaranteed by the Federal Deposit Insurance Corporation (FDIC), the bank was not subject to a stress test by the Federal Reserve, which would have forced the bank to diversify its investments.[1]
Clients of the bank were in a difficult situation due to the fact that federal insurance only guarantees deposits of up to $250,000.[2] No one but a start-up would keep more money than that in a bank account.[3] The Economist stated that nearly 93% of SVB's deposits were not covered by insurance.[3]
As word traveled through Silicon Valley that SVB was in distress, large depositors began to yank their money—so quickly that, last Friday, regulators seized the bank.[4] Regulators took control of another mid-sized bank, Signature, on Sunday night, which had similar characteristics such as a large number of uninsured deposits and a clientele largely composed of tech-savvy customers.[4] The FDIC announced on Sunday that they would provide retroactive protection to all depositors in two failed banks, not just the smaller ones that have insurance, in order to prevent a potential run on other mid-sized banks.[4] The Federal Reserve and Treasury Department stated that banks dealing with similar circumstances – such as having to sell Treasury bonds to cover deposits – could approach the Federal Reserve for a loan, secured by the Treasury securities as collateral, thereby enabling them to “meet the needs of all their depositors,”.[4]
While the FDIC’s decision was made to protect SVB’s depositors, this incident has generated much controversy.[5]
0. “The collapse of Silicon Valley Bank, explained visually” USA TODAY, 14 Mar. 2023, https://www.usatoday.com/story/graphics/2023/03/13/graphics-bank-collapse-silicon-valley/11466073002/
1. “Opinion | The Boys Who Cried ‘Woke!’” The New York Times, 14 Mar. 2023, https://www.nytimes.com/2023/03/14/opinion/silicon-valley-bank-republicans-woke.html
2. “Opinion | How Bad Was the Silicon Valley Bank Bailout?” The New York Times, 14 Mar. 2023, https://www.nytimes.com/2023/03/14/opinion/silicon-valley-bank-bailout.html
3. “Silicon Valley Bank Bailout is Socialism for the Rich” Washington Free Beacon, 13 Mar. 2023, https://freebeacon.com/columns/silicon-valley-bank-bailout-is-socialism-for-the-rich
4. “Silicon Valley Bank: Who's to Blame?” City Journal, 13 Mar. 2023, https://www.city-journal.org/silicon-valley-bank-who-is-to-blame
5. “How Do Bank Rescues In India Fare Versus The U.S.?” BQ Prime, 14 Mar. 2023, https://www.bqprime.com/opinion/how-do-bank-rescues-in-india-fare-versus-the-us
