SVB Collapse Sparks Wave of Implications
By Silicon Valley Bank, the go-to lender for tech startups and venture capitalists, was swiftly closed down by regulators on Friday morning after it collapsed due to a failed $2.3 billion capital raise and a run on deposits.[0]
The FDIC, an independent government agency that insures bank deposits and oversees financial institutions, closed Silicon Valley Bank and put it into receivership.[1] The bank, which was the 16th largest bank in the U.S. with $209 billion in total assets at the end of 2022, had to sell $21 billion in bonds at a loss of $1.8 billion in order to make good on customer withdrawals and shore up liquidity.
The FDIC said all insured depositors will have access to their insured deposits no later than Monday morning, and that it will pay uninsured depositors an “advance dividend within the next week.”[2]
The Federal Reserve's interest rate hikes caused a decrease in the value of securities positions held by SVB, resulting in customer withdrawals that forced the company to liquidate those positions.[3] The quick jump in rates meant that securities they had bought were selling for significantly less.[3]
The cause of SVB's downfall can be traced to the disruptions caused by increased interest rates.[4] With clients of startups withdrawing funds to maintain their businesses in an unfavorable climate for IPOs and private fundraising, SVB had a lack of capital.[4]
The downfall of Silicon Valley Bank, the most significant retail banking disaster since the worldwide financial downturn, has caused a ripple of repercussions the extent of which is yet to be discovered.[3]
Many startups kept far more than the FDIC's $250,000 insurance limit with the bank, leaving them at risk of losing a large sum of money. White House Council of Economic Advisers chair Cecilia Rouse emphasized that the reforms that were put in place after the global financial crisis of 2007, 2008 provide the kind of resilience needed in the banking system.
This situation is unlikely to morph into a broader banking crisis due to the reforms of the past decade, which have made the US banking system more resilient. Analysts said SVB's collapse is unlikely to set off the kind of domino effect that gripped the banking industry during the financial crisis.
The downfall of SVB serves as a prime illustration of the disruptions that become evident when interest rate cycles alter.[5]
0. “Sunday shows preview: Silicon Valley Bank collapses; US relations with China, Russia remain tense” The Hill, 11 Mar. 2023, https://thehill.com/homenews/sunday-talk-shows/3895525-sunday-shows-preview-silicon-valley-bank-collapses-us-relations-with-china-russia-remain-tense
1. “Where Were the Regulators as SVB Crashed?” The Wall Street Journal, 11 Mar. 2023, https://www.wsj.com/articles/where-were-the-regulators-as-svb-crashed-35827e1a
2. “Mark Cuban urges Fed to buy Silicon Valley Bank debt ‘immediately,’ says it’s ‘not the wealthy taking the hit’” Fortune, 11 Mar. 2023, https://fortune.com/2023/03/11/mark-cuban-fed-buy-silicon-valley-bank-debt-immediately-not-wealthy-taking-hit/
3. “How Silicon Valley Bank Collapse Impacted A 116-Year-Old Indian Bank” NDTV, 12 Mar. 2023, https://www.ndtv.com/india-news/how-silicon-valley-bank-collapse-impacted-a-116-year-old-indian-bank-3853583
4. “Here's how the second-biggest bank collapse in U.S. history happened in just 48 hours” CNBC, 10 Mar. 2023, https://www.cnbc.com/2023/03/10/silicon-valley-bank-collapse-how-it-happened.html
5. “Silicon Valley Bank failure signals widespread risk amid high interest rates” Markets Insider, 11 Mar. 2023, https://markets.businessinsider.com/news/stocks/silicon-valley-bank-failure-collapse-interest-rate-hikes-financial-risks-2023-3
