Silicon Valley Bank, the fabled “bank of the global innovation economy,” has collapsed, leaving tech startups scrambling for answers. 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.
Clients of the bank were in a difficult situation due to the fact that federal insurance only guarantees deposits of up to $250,000. No one but a start-up would keep more money than that in a bank account. The Economist stated that nearly 93% of SVB's deposits were not covered by insurance.
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. 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. 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. 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,”.
While the FDIC’s decision was made to protect SVB’s depositors, this incident has generated much controversy.
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