Silicon Valley Bank Collapse Highlights Need For Diversification and Regulation
Silicon Valley Bank (SVB) was founded in 1983 and quickly became the go-to bank for the tech sector in Santa Clara, California.[0] It claimed to be the financial partner for nearly half of all US venture-backed startups by 2021.[1] SVB’s close ties to the financial infrastructure of the tech industry made it risky for the bank to take most of its deposits from one industry, especially when low interest rates, easy money, and cheap loans made that sector so lucrative.
On March 8, the bank announced it had sold $21 billion of assets at a $1.8 billion loss and needed to raise $1.75 billion in shares to plug the hole.[2] As clients began to panic and withdraw their money, the bank’s stock price plummeted.[3] The following night, depositors attempted to withdraw $42 billion, making SVB insolvent.[3] The Federal Deposit Insurance Corporation (FDIC) then took control of SVB and announced it would insure all depositors, even those above the normal $250,000 limit.[4]
The bank’s risky business model and lack of diversification likely contributed to its downfall. SVB catered to venture capital and private equity, and had more than $200 billion in assets when it failed, making it the largest bank to fail since the Great Recession.[5] It was particularly flexible about lending to tech startups that may not have had much in the way of cash flow or assets.[4]
The Federal Reserve has made funds available to other banks to help prevent any additional collapses in the financial industry.[6] Other banks are not as precariously positioned as SVB was and have not seen the same level of withdrawals, but investors are concerned about the banking sector as a whole.[7] SVB’s failure has highlighted the importance of diversification and regulation, and the potential risks of putting too much faith in a single industry.
0. “Trump-era banking law paved way for Silicon Valley Bank’s collapse” Vox.com, 13 Mar. 2023, https://www.vox.com/business-and-finance/2023/3/13/23638655/silicon-valley-bank-trump-fdic-banking-law
1. “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
2. “Signature Bank's collapse could deal a blow to cryptocurrency industry” The Washington Post, 13 Mar. 2023, https://www.washingtonpost.com/technology/2023/03/13/signature-bank-collapse-crypto/
3. “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
4. “Despite rescue, Seattle startups and banks face SVB blowback” The Seattle Times, 14 Mar. 2023, https://www.seattletimes.com/business/despite-rescue-seattle-startups-and-banks-face-svb-blowback/
5. “What is Silicon Valley Bank? The bank’s collapse, explained.” Vox.com, 12 Mar. 2023, https://www.vox.com/technology/23634433/silicon-valley-bank-collapse-silvergate-first-republic-fdic
6. “U.S. government steps in to shore up deposits at Silicon Valley Bank and another failed institution” CBS News, 13 Mar. 2023, https://www.cbsnews.com/news/silicon-valley-bank-deposits-guaranteed-signature-bank-federal-reserve-fdic/
7. “After Silicon Valley Bank collapses, plenty of worries over what's next” NPR, 14 Mar. 2023, https://www.npr.org/2023/03/14/1163135286/silicon-valley-bank-collapse-fallout-whats-next
