California Regulators Shut Down Silicon Valley Bank: How and Why it Collapsed
On Friday, March 10, 2023, California regulators shut down Silicon Valley Bank (SVB), one of the largest banks in the US and the go-to lender for tech startups. This marked the biggest bank failure in the country since the Great Recession and sent shockwaves through the global economy.
SVB was founded in 1983 in Santa Clara, California, and quickly became the bank for the burgeoning tech sector. It claimed to bank for nearly half of all US venture-backed startups as of 2021, and was also a banking partner for a lot of the venture capital firms that fund those startups.
The bank’s collapse was largely attributed to a mismatch between assets and liabilities. A sharp surge in deposits occurred, and these were largely invested in long-term bonds, particularly those which were government-guaranteed mortgage securities. As the Federal Reserve began aggressively raising interest rates, funding sources for tech startups dried up, putting pressure on deposits, and at the same time, Fed rate hikes triggered a historic bond-market selloff, putting a big dent in the value of SVB’s securities holdings.
On Thursday, the share price of SVB plummeted by 60%, resulting in a one-day mark-to-market profit of approximately $513 million for traders who had bet against the stock. This was due to increasing anxieties concerning the bank's operations. Friday morning, the stock dropped another 63% prior to being stopped, and the Federal Deposit Insurance Corp. declared that it had taken control of the bank. The bank announced a $1.8 billion loss Thursday following a $21 billion fire sale of its fixed-income portfolio.
The U.S. government declared that on Monday morning, all depositors at the failed Silicon Valley Bank would be able to access their funds. The announcement seemed to involve deposits of greater value than the maximum $250,000 that is federally insured. More than 90 percent of the bank’s customers had account balances above this.
As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets. Despite skeins of bank regulations meant to prevent another financial meltdown, Silicon Valley Bank went down in flames last week, and its failure has prompted a lot of finger-pointing.
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