Silicon Valley Bank Collapse: A Reminder of Banking Risks
Silicon Valley Bank (SVB) has gone down in history as the largest US bank failure since the 2008 Great Recession.[0] Founded in 1983, SVB had become deeply ingrained in the financial infrastructure of the tech industry, banking for nearly half of all venture-backed tech startups and many in the healthcare sector.[0] Last Friday, the Federal Deposit Insurance Corporation (FDIC) took control of SVB after a bank run and capital crisis.[1]
SVB specialized in catering to venture capital and private equity firms, so it experienced high growth as tech boomed over the past decade.[2] However, its depositor base was too concentrated in firms and employees from the venture capital realm, and when things got bad for its non-diversified group of clients, it very quickly got bad for the bank.[3]
The bank's collapse was precipitated by an announcement on March 8 that it had sold $21 billion of assets at a $1.8 billion loss and was going to sell $1.75 billion worth of shares to help plug that hole.[1] This spooked markets and clients, leading to massive withdrawals, which rendered the financial institution insolvent.[4]
The FDIC said it would retroactively protect all depositors at the two failed banks, not just smaller, insured, depositors.[5] The Federal Reserve and the Treasury Department also said that banks facing similar situations—having to sell Treasury securities to meet deposits—could instead borrow from the Fed.[5]
US President Joe Biden sought to reassure Americans that the banking system was sound, saying “Americans can have confidence that the banking system is safe. Your deposits are safe.”[6] However, many of SVB's depositors had more than $250,000 held at the bank, which is above the FDIC’s normal insurance guarantee in case of bank failure.[5]
The incident has sent shock waves across the tech sector, and it serves as a reminder of the risks associated with having a single industry make up the majority of a bank's deposits.[7] Despite assurances from the government that deposits are safe, uninsured US depositors do, in practice, lose money with some frequency.[4] Moving forward, it is essential to ensure that banks build solid and diversified portfolios and that depositors exercise caution when considering where to keep their hard-earned money.
0. “‘Lungs of the startup world’: bank fall upends most Silicon Valley industries” The Guardian, 15 Mar. 2023, https://www.theguardian.com/technology/2023/mar/15/silicon-valley-bank-failure-industries-investors-rattled
1. “Silicon Valley Bank's failure, the government's depositor rescue, and venture capitalists' incredible tantrum.” Slate, 13 Mar. 2023, https://slate.com/technology/2023/03/silicon-valley-bank-rescue-venture-capital-calacanis-sacks-ackman-tantrum.html
2. “What is Silicon Valley Bank? The bank’s collapse, explained.” Vox.com, 14 Mar. 2023, https://www.vox.com/technology/23634433/silicon-valley-bank-collapse-silvergate-first-republic-fdic
3. “Government fear-mongering over Silicon Valley Bank — and how to profit” New York Post , 15 Mar. 2023, https://nypost.com/2023/03/15/government-fear-mongering-over-silicon-valley-bank-and-how-to-profit/
4. “The Silicon Valley Bank collapse couldn’t have happened in this one state” Vox.com, 15 Mar. 2023, https://www.vox.com/policy/23636583/silicon-valley-bank-collapse-fdic-deposit-massachusetts
5. “Silicon Valley Bank: Who's to Blame?” City Journal, 13 Mar. 2023, https://www.city-journal.org/silicon-valley-bank-who-is-to-blame
6. “Why did Silicon Valley Bank fail and is a financial crisis next?” Al Jazeera English, 14 Mar. 2023, https://www.aljazeera.com/economy/2023/3/14/why-did-silicon-valley-bank-fail-and-is-a-financial-crisis-next
7. “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
