Why Silicon Valley Bank, one of the largest US banks, collapsed
By Team Newsable | First Published Mar 11, 2023, 2:35 PM ISTThe bank's closure triggered worldwide panic in the banking sector on Friday.
Regulators in the United States have ordered the closure of Silicon Valley Bank, one of the largest banks in the country. The 16th largest bank in America, which has assets of around $210 billion, is the main bank providing financial assistance to modern-day tech companies and venture capital investment companies. Following the regulators' action, shares of the parent company of the bank also fell.
The bank, which has a presence in Europe, Asia and Israel besides the United States, offers a range of financial services to startups. These include advisory services related to wealth management and investments and simple bank accounts. The bank's closure triggered worldwide panic in the banking sector on Friday.
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According to media reports, less than two weeks before the firm disclosed extensive losses that led to its failure, Silicon Valley Bank CEO Greg Becker sold $3.6 million of company stock under a trading plan. Silicon Valley Bank is the first Federal Deposit Insurance Corporation (FDIC)-insured institution to fail in 2023.
The action against the bank was taken by the California Department of Financial Protection and Innovation, which then appointed the FDIC as the receiver.
To protect insured depositors, the FDIC has created the Deposit Insurance National Bank of Santa Clara (DINB), which will ensure that all insured depositors will get access to their insured deposits by Monday morning. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds.
To note, Silicon Valley Bank had about $175.4 billion in total deposits and $209.0 billion in total assets as of December 31, 2022. According to the FDIC, the number of deposits in excess of the insurance limits was undetermined at the time of closing. Customers with accounts in excess of $250,000 have been asked to contact the FDIC.
Startup panic
The bulk of the bank's clients are startups that have received funding from venture investors (the bank has helped finance more than 30,000 startups).
On March 9, SVB announced a loss of $1.8 billion. The publication of the report coincided with the news of the closure of the California-based cryptocurrency bank Silvergate and caused panic among investors.
Depositors began withdrawing funds from SVB en masse, which led to a sharp decrease in liquidity. SVB shares collapsed by 60% in two days, and trading in the bank's securities was stopped.
So why did the bank collapse?
SVB found itself vulnerable to the deteriorating conditions of the tech industry, which included continued supply chain issues, weakening risk appetite of investors and the sharp increase in interest rates.
The stock market capitalization of tech companies tumbled last year after more than a decade of relentless growth. This triggered tens of thousands of layoffs.
The increase in interest rates have also adversely impacted banks. While higher interest rates are generally good for banks as they earn more from lending, a lot depends on the rate they have to pay to acquire funds.
Short-term interest rates are currently higher than long-term interest rates in the United States, squeezing weaker banks and complicating investments.
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