Silicon Valley Bank Collapse

Publication Date :

11 Jul, 2023

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What Was Silicon Valley Bank Collapse?

The Silicon Valley Bank (SVB) Collapse occurred in March 2023 when the California Department of Financial Protection and Innovation shut down the bank based in California, United States. The shutdown happened after the bank's investment value declined massively, and the depositors started withdrawing their money in huge numbers. Moreover, there were other contributing factors.

The SVB became the 16th largest bank in the United States after rising from its existing rank, the 34th position. In March 2023, the bank holding company First Citizens bought up all the loans and deposits from the bank, which led to its ultimate failure. The bank collapse transpired when predictions about a recession loomed up shortly.

What Was Silicon Valley Bank Collapse?

The Silicon Valley Bank collapse occurred on 10 March 2023, when the California-based bank got shut down under the California Department of Financial Protection and Innovation's order. It was the most significant bank failure in US history since 2008.
SVB was the 16th largest bank in the USA. It grew rapidly during the pandemic, almost tripling in size between the years 2019 and 2022. It served venture capital firms and startup companies majorly.
The bank started losing its investment value and experienced significant withdrawals from depositors. SVB failed primarily due to its improper management and lax regulations.

Silicon Valley Bank Collapse Explained

The Silicon Valley Bank Collapse was when the federal regulators shut down the 16th largest bank in the United States. The SVB, based in California, is a subsidiary of the SVB Financial Group. It grew into one of the largest commercial banks in the States. During the Covid-19 pandemic, from 2019 to 2022, it experienced rapid growth, almost tripling its initial size. In December 2022, it owned assets worth about $209 billion.

On 10 March 2023, the California Department of Financial Protection and Innovation shut down the bank for several reasons. The major contributing factors included the bank losing its investment value and witnessing massive withdrawals by the depositors. The Federal Reserve blamed the bank's mismanagement, the regulators, and social media for its downfall.

The SVB offered its financial and banking services to companies with various backgrounds. But it was particularly famous for catering to venture-backed firms and startup companies. After the bank collapsed, the federal regulators took steps to secure the depositor's funds. It included those not protected under the Federal Deposit Insurance Corporation (FDIC). However, the investors who owned stocks in the SVB are not likely to get their money back.

Reasons

The reason for the Silicon Valley bank collapse is as follows:

The SVB invested significant of its bank deposits in buying long-term treasury bonds and other securities. However, when the Federal Reserve increased the interest rates in 2022 to battle against inflation, the bank started losing money as the bonds and treasury values declined with the interest hike. SVB might have recovered the capital if it could hold the securities until their maturity.

Although the bank would lend money for short durations, in 2021, they started buying long-term securities for more returns. Moreover, SVB did not invest in short-term securities for faster liquidation to protect the liabilities. Additionally, the economic factors impacted the tech sector resulting in the venture capital drying up.

Most SVB customers started withdrawing their money, but the bank had insufficient cash to liquidate the deposits. Eventually, SVB was forced to sell the securities at massive losses, and within 48 hours of disclosing the securities sale, the bank collapsed. On March 8, 2023, SVB announced its capital raising, which caused distress to the public about its lack of capital. News about the bank's plight started spreading on social media, and alarmed customers began withdrawing their money. The federal regulators shut the bank down, placing SVB under the FDIC.

Timeline

The timeline of the Silicon Valley bank collapse in 2023 is as follows:

8 March: The SVB declared that it is facing a $1.8 billion loss on its securities and plans to sell its stock to issue $2.25 billion capital.
9 March: The SVB Financial Group stocks crashed at the market opening while other significant banks also experienced declining stock prices. The alarmed SVB customers started withdrawing their money to almost $42 billion.
10 March: The SVB Financial Group stock trading paused, and before the trading day began, the Federal regulators declared that they would take over.
12 March: The Federal regulators announced emergency actions post the bank's downfall. They allowed the customers to recover all their money, including those not insured.
17 March: SVB Financial Group, the bank's parent company, declared bankruptcy.
26 March: The First Citizens Bank purchased everything except the securities worth $90 billion, and other assets remained under the FDIC receivership.

Impact

The impact of the Silicon Valley bank collapse is discussed below:

The SVB stockholders and investors faced an impact from the collapse because, unlike customers, the FDIC did not protect or insure their investments. They are not likely to receive the money they had invested in the bank's assets.
Large companies that had deposited massive funds in the bank are suffering from the lack of money from their deposits for immediate expenses. Moreover, venture-backed and startup companies were dependent on SVB for financial assistance. As a result, these companies may also find it challenging to repay their loans and cover other necessary expenses.

How Was Silicon Valley Bank Bailed Out?

On 26 March 2023, the FDIC declared that the First Citizens Bank would buy SVB and assume a significant portion of its loans and deposits. The bank reported almost $199 billion in deposits and assets worth about $167 billion. The First Citizens Bank will buy nearly $72 billion in assets at the discounted rate of $16.5 billion. The FDIC will take charge of $90 billion in assets and securities in its receivership. The FDIC's deposit insurance fund bailed out the uninsured depositors directly.

Frequently Asked Questions (FAQs)

1. How bad was the Silicon Valley bank collapse?

The SVB collapse was considered the most significant bank failure in United States history since the Washington Mutual that happened in 2008. SVB went from solvent to completely bankrupt within two days. The FDIC calculated that the SVB's failure cost almost $20 billion. The collapse created an upheaval in the global markets, leaving numerous companies and investors stranded with their lack of transparency.

2. What does Silicon Valley bank collapse mean for startups?

The SVB collapse had a significant impact on startups and venture capital firms. For instance, some startups were forced to postpone or cancel their expansion plans due to lacking capital. This led to a decline in innovation, which eventually affected the economic growth in that region. Many venture-backed firms relied on debt financing from SVB to fund their investments. They lost their access to this financing type. Thus, they were forced to secure funds from other sources or modify their investment strategies.

3. Who is at fault for the Silicon Valley bank collapse?

The Federal Reserve blamed inadequate management and weak regulations for its collapse. It further said that the industry requires more stringent rules on several fronts to prevent such bank failures in the future.