The Fall of Silicon Valley Bank: Examining the Collapse of a Tech Banking Giant
Silicon Valley Bank, a 40-year-old institution based in Santa Clara, California, had become the bank of choice for nearly half of all U.S. tech startups backed by venture capital. But on Thursday, March 11, rumblings of a bank run on SVB began and by Friday it had collapsed, becoming the largest American bank failure since the 2008 financial crisis.
SVB had catered to the tech industry and its venture capitalists, offering services such as venture debt, lines of credit, and wealth management. It also had a large deposit base, with over 90% of its deposits surpassing the $250,000 limit for federal insurance. This made it vulnerable to a bank run, which is exactly what happened when word of SVB’s distress spread.
The Biden administration stepped in to protect the U.S. economy, stating that all depositors at the failed bank would have access to their money. It also allowed other banks facing similar situations to borrow from the Federal Reserve using Treasury securities as collateral.
The failure of SVB is unique as it was so concentrated in its business. The bank was so closely intertwined with the tech industry that when things went bad for its clients, it quickly went bad for the bank as well. This was exacerbated by the fact that the bank was willing to make risky loans to startups that didn’t have much in the way of free cash flow or assets.
SVB also got into trouble when it tried to invest its deposits in long-term U.S. Treasury and mortgage bonds. When interest rates rose, the bonds became a bad investment and the bank was unable to meet the demands of its depositors.
The bank’s failure sparked a debate among politicians and commentators. Some argued that SVB was too focused on “woke” issues such as diversity and environmental, social, and governance-type policies, and not enough on common sense business practices. Others blamed the bank’s risky investments and its reliance on the tech industry, which was particularly vulnerable to the economic downturn caused by the pandemic.
Regardless of the cause of SVB’s collapse, it is clear that the bank’s demise has sent shockwaves through the banking and tech industries. With the Biden administration stepping in to protect depositors, the U.S.
0. “Startups ‘on pins and needles' until their funds clear from Silicon Valley Bank” NPR, 14 Mar. 2023, https://www.npr.org/2023/03/13/1163272334/silicon-valley-bank-startups-worries
1. “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/
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: Who's to Blame?” City Journal, 13 Mar. 2023, https://www.city-journal.org/silicon-valley-bank-who-is-to-blame