Silicon Valley Bank’s Collapse: A Cautionary Tale of Overexposure to Tech
Silicon Valley Bank, the California bank subsidiary of SVB Financial Group (SIVB), was shut down Friday by the California Department of Financial Protection and Innovation with the Federal Deposit Insurance Corporation (FDIC) appointed as its receiver.[0] SVB's downfall was tied to the plunge in the value of bonds it acquired during boom times and its overexposure to the tech industry.[1]
The bank’s collapse stemmed from dislocations spurred by higher interest rates. Due to a decrease in startup clients investing in IPOs and private fundraising, SVB had a lack of capital as they withdrew their deposits to maintain their companies.[2] The bank reported late Wednesday that it had been forced to offload its bonds for sale at a $1.8 billion loss.[2] After it was announced that the bank needed to raise $2.25 billion to shore up its balance sheet, clients panicked and tried to withdraw their money.[2] The FDIC stepped in to take control of the bank on Friday.
Most of SVB’s deposits were uninsured, meaning many of the bank’s clients may never see their money again or may lose substantial amounts.[3] The FDIC will guarantee deposits of up to $250,000, depending on the size of the company, but that money may not go very far.[4]
Founded over a poker game in 1983, Silicon Valley Bank quickly became the go-to lender for tech startups that appeared too risky in the eyes of larger, more traditional banks.[5] It specialized in the tech industry and was the financial partner of the innovation economy, servicing 65 percent of all existing start-ups and many of the most prominent venture capital firms.[6]
The bank’s collapse is a reminder of the risk that comes with a high concentration of large uninsured deposits and the importance of diversification. It is also a cautionary tale of the dangers of relying too heavily on one industry. As the tech industry has done well over the past decade, so has SVB.[7] But, its overexposure to the tech industry ultimately proved to be its downfall.
0. “My Trade Amid SVB's Fall? An ‘Insurance Policy' on BofA I Hope Doesn't Pay Off” RealMoney, 12 Mar. 2023, https://realmoney.thestreet.com/investing/stocks/my-bank-trade-an-insurance-policy-on-bofa-i-hope-doesn-t-pay-off-16118056
1. “US banks sitting on unrealized losses of $620 billion” CNN, 12 Mar. 2023, https://www.cnn.com/2023/03/12/investing/stocks-week-ahead/index.html
2. “Here's how the second-biggest bank collapse in U.S. history happened in just 48 hours” CNBC, 10 Mar. 2023, https://www.cnbc.com/2023/03/10/silicon-valley-bank-collapse-how-it-happened.html
3. “‘Big Short' investor Michael Burry blames SVB crisis on ‘hubris and greed'” New York Post , 13 Mar. 2023, https://nypost.com/2023/03/13/investor-michael-burry-blames-svb-crisis-on-hubris-and-greed
4. “Mark Cuban urges Fed to buy Silicon Valley Bank debt ‘immediately,’ says it’s ‘not the wealthy taking the hit’” Fortune, 11 Mar. 2023, https://fortune.com/2023/03/11/mark-cuban-fed-buy-silicon-valley-bank-debt-immediately-not-wealthy-taking-hit/
5. “Silicon Valley Bank failure could wipe out ‘a whole generation of startups'” NPR, 11 Mar. 2023, https://www.npr.org/2023/03/11/1162805718/silicon-valley-bank-failure-startups
6. “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
7. “What is Silicon Valley Bank? The bank’s collapse, explained.” Vox.com, 10 Mar. 2023, https://www.vox.com/technology/23634433/silicon-valley-bank-collapse-silvergate-first-republic-fdic
