Four decades ago, Silicon Valley Bank (SVB) was born in the heart of a region known for its
technological prowess and savvy decision making.
The California-headquartered organization grew to become the 16th largest bank in the US,
catering for the financial needs of technology companies around the world, before a series of ill-
fated investment decisions led to its collapse.
What happened to SVB?
As the preferred bank for the tech sector, SVB’s services were in hot demand throughout the pandemic years.
The initial market shock of Covid-19 in early 2020 quickly gave way to a golden period for startups and established
tech companies, as consumers spent big on gadgets and digital services.
Many tech companies used SVB to hold the cash they used for payroll and other business expenses, leading to an
influx of deposits. The bank invested a large portion of the deposits, as banks do.
The seeds of its demise were sown when it invested heavily in long-dated US government bonds, including those
backed by mortgages. These were, for all intents and purposes, as safe as houses.
But bonds have an inverse relationship with interest rates; when rates rise, bond prices fall. So when the Federal
Reserve started to hike rates rapidly to combat inflation, SVB’s bond portfolio started to lose significant value.
If SVB were able to hold those bonds for a number of years until they mature, then it would receive its capital back.
However, as economic conditions soured over the last year, with tech companies particularly affected, many of the
bank’s customers started drawing on their deposits.
SVB didn’t have enough cash on hand, and so it started selling some of its bonds at steep losses, spooking investors
It took just 48 hours between the time it disclosed that it had sold the assets and its collapse.
Causes behind the fall of Silicon Valley Bank
Silicon Valley Bank was hit hard by the downturn in technology stocks over the past year as well as the Federal
Reserve's aggressive plan to increase interest rates to combat inflation.
The bank bought billions of dollars worth of bonds over the past couple of years, using customers' deposits as a
typical bank would normally operate.
These investments are typically safe, but the value of those investments fell because they paid lower interest
rates than what a comparable bond would pay if issued in today's higher interest rate environment.
Typically that's not an issue, because banks hold onto those for a long time unless they have to sell them in an
SVB is a bank for startups.
It opened accounts for them, often before larger lenders would bother. It also lent to them,
which other banks are reluctant to do because few startups have assets for collateral.
As Silicon Valley boomed over the past five years, so did SVB.
Its clients were flush with cash. They needed to store money more than to borrow.
Thus SVB's deposits more than quadrupled-from $44bn at the end of 2017 to $189bn at the
end of 2021-while its loan book grew only from $23bn to $66bn.
Since banks make money on the spread between the interest rate they pay on deposits
(often nothing) and the rate they are paid by borrowers, having a far larger deposit base than
loan book is a problem.
SVB needed to acquire other interest-bearing assets.
By the end of 2021, the bank had made $128bn of investments, mostly into mortgage bonds
DEPOSITORS Started withdrawing
The startups and other tech-centric companies started becoming more needy for cash over the past year.
Venture capital funding was drying up, companies were not able to get additional rounds of funding for unprofitable
businesses, and therefore had to tap their existing funds,
Often deposited with Silicon Valley Bank, which sat in the center of the tech startup universe.
So Silicon Valley customers started withdrawing their deposits.
Initially that wasn't a huge issue, but the withdrawals started requiring the bank to start selling its own assets to meet
customer withdrawal requests.
Because Silicon Valley customers were largely businesses and the wealthy, they likely were more fearful of a bank failure.
Since their deposits were over $250,000, which is the government-imposed limit on deposit insurance.
That required selling typically safe bonds at a loss, and those losses added up to the point that Silicon Valley Bank became
The bank tried to raise additional capital through outside investors, but was unable to find them.
The fancy tech-focused bank was brought down by the oldest issue in banking: a good old' run on the bank.
Bank regulators had no other choice but to seize Silicon Valley Bank's assets to protect the assets and deposits still
remaining at the bank.
Impact of Downfall of SVB
Firstly, SVB is a major lender to the technology and startup industries, and due to its collapse, it could have a
significant impact on these industries. Many startups and tech companies rely on financing from SVB to fund
their growth, and if that financing were to disappear, it could lead to a slowdown in innovation and growth in
the tech sector.
Secondly, SVB is a significant player in the venture capital industry, with a number of its own venture capital
funds and a large network of connections to other VC firms. SVB's failure could have a ripple effect
throughout the venture capital industry, potentially leading to a reduction in the amount of funding available
Thirdly, SVB is also a major bank for high-net-worth individuals and families. Its collapse could lead to these
individuals potentially losing a significant amount of their assets, which could have broader economic
Overall, the downfall of Silicon Valley Bank could have far-reaching consequences, particularly for the
technology and startup industries, the venture capital industry, and high-net-worth individuals and families.
IMPACT ON INVESTORS:
Many have called out SVB for its own missteps that created anxiety in the markets. But, there
will be increased scrutiny of the influence of tech investors. While some investors fear the bank
closure could further push startup investing downward, others are optimistic that it could go in
the opposite direction. The bank’s collapse could cause the Federal Reserve to ease interest rate
hikes, re-igniting investor sentiment in the venture capital market.
Did SVB receive a bailout?
The government is not saving SVB; it will stay collapsed – or wound up with remaining assets
dispersed to creditors – unless a buyer can bring it back to life.
However, late on Sunday US agencies extended a guarantee to cover all deposits at the bank, as
well as for customers at a second smaller institution, Signature Bank, that collapsed over the
weekend. It means customers at SVB will be able to access all their money on Monday morning.
Shareholders in the bank and some unsecured creditors aren’t protected by the guarantees.
Will this affect interest rates?
Central banks around the world have been raising rates over the past year to tame high
inflation, with the US moving from near zero to more than 4.5% at a rapid pace.
Most forecasters expect rates to go higher in the US, UK and Australia, before stabilizing.
The appetite to keep raising rates will now be tested if central banks become concerned that
SVB’s problems are indicative of a broader weakness in corporate balance sheets caused by