Silicon Valley Bank collapse: What comes next?
On Friday, Silicon Valley Bank, the financial institution renowned for its ties with cutting-edge technology startups and venture capital, suffered a bank run, one of the most longstanding issues in banking, ultimately causing its collapse.
What led to this outcome? More about the reasons behind the bank’s downfall, which groups and companies were impacted the most, and the potential implications, both positive and negative, for the broader worldwide banking system.
Why did the bank fell?
The past year’s decline in technology stocks, coupled with the Federal Reserve’s strategy to boost interest rates as a countermeasure against inflation, dealt a significant blow to Silicon Valley Bank.
Over the last few years, the bank procured billions of dollars in bonds by utilizing customers’ deposits, following the standard banking procedure. Although these investments usually carry minimal risk, their value declined due to the fact that they offered lower interest rates than comparable bonds currently issued in the higher interest rate environment.
Normally, this wouldn’t pose a problem since banks tend to retain these investments for extended periods, except in emergencies when they must sell them.
However, the majority of Silicon Valley Bank’s clients were tech startups and other companies with a tech-centric focus, which increasingly required cash over the past year. Due to the shrinking availability of venture capital funding and companies being unable to secure additional rounds of funding for their non-profitable enterprises, they had to resort to tapping into their existing funds, frequently deposited with Silicon Valley Bank, which occupied a central position in the tech startup world.
As a result, Silicon Valley Bank’s customers began to pull out their deposits. Initially, this did not pose a significant problem, but as the withdrawals mounted, the bank was compelled to sell its assets to fulfill these requests. Given that most of the bank’s customers were affluent individuals and businesses, they were presumably more apprehensive about the possibility of a bank collapse, as their deposits exceeded the government-imposed deposit insurance limit of $250,000.
What comes next?
Silicon Valley Bank faces two major unresolved problems that could potentially exacerbate if not addressed promptly.
- The most pressing concern at present is the significant deposits held by Silicon Valley Bank, which the Federal government only insures up to $250,000. Anything above this amount is deemed uninsured. The Federal Deposit Insurance Corporation has announced that insured deposits will be accessible on March 13th. However, the majority of Silicon Valley Bank’s deposits, originating from startups and affluent tech workers, remain uninsured.
- Secondly, Silicon Valley Bank currently has no potential buyer. Normally, regulators search for a stronger bank to acquire the assets of a struggling bank, but in this instance, no other bank has come forward. If a bank were to purchase Silicon Valley Bank, it could potentially help address the issues related to the funds that startups are currently unable to access.
Do we need to expect more banks to fall?
Currently, there are no indications of problems spreading to the wider banking industry, and industry experts do not anticipate such issues.
Silicon Valley Bank was a big financial institution, but its distinctive business model focused almost entirely on serving the technology industry and venture capital-backed firms. As a result, it was significantly affected by the downturn in the tech sector over the past year.
Unlike Silicon Valley Bank, other banks are much more diversified across various industries, customers, and regions. The recent “stress tests” conducted by the Federal Reserve on the largest banks and financial institutions demonstrated that they would withstand a severe economic downturn and a significant decrease in employment.
