By Ken Sweet —
The Associated Press
The financial institution best known for its dealings with high-flying venture capital and technology startups, Silicon Valley Bank, suffered one of banking's oldest problems, a bank run, which led to its bankruptcy on Friday.
Its fall is the biggest failure of a financial institution since Washington Mutual collapsed at the height of the financial crisis more than a decade ago, with immediate effects.
Some startups with ties to the bank rushed to pay their workers, fearing they would have to pause projects or lay off or furlough employees until they could access their funds.
How did this happen?
Here's what you need to know about why the bank failed and who was affected most.
Also, how what happened can and cannot affect the banking system in general in the United States.
Customers try to access the Park Avenue location of Silicon Valley Bank (SVB), in New York City, after learning of its fall, on March 10, 2023. DAVID DEE DELGADO / REUTERS
Why did Silicon Valley Bank fall?
Silicon Valley Bank has been hit hard by falling technology stocks over the past year, as well as the Federal Reserve's aggressive plan to raise interest rates to combat inflation.
The bank has bought billions of dollars in bonds over the past two years, using customer deposits as a typical bank would normally.
These investments are typically safe, but the value of those investments fell because
they paid lower interest rates
than a comparable bond would pay if issued in today's higher interest rate environment.
That's usually not a problem, because banks keep them for a long time, unless they have to sell them in an emergency.
[Three things to know before filing your taxes]
But Silicon Valley customers were mostly tech-focused startups and startups that
they began to
need more cash during the past year
.
VC funding was drying up, companies couldn't get additional rounds of funding for unprofitable deals, and therefore had to tap their existing funds, usually on deposit with Silicon Valley Bank, which was in the center of the universe of technology start-ups.
So Silicon Valley customers
started withdrawing their deposits
.
Initially, that wasn't a big problem, but the withdrawals meant that the bank had to start selling its own assets to meet customer withdrawal requests.
Because Silicon Valley clients were mostly businesses and wealthy individuals, they were likely more afraid of a bank failure since their deposits exceeded $250,000, which is the federally imposed limit for deposit insurance coverage.
The risk of making purchases on social networks goes beyond losing money: these are the tips
Feb 13, 202302:15
All of this required selling typically safe bonds at a loss, and those losses added up to the point where
Silicon Valley Bank effectively became insolvent
.
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 banking's oldest problem: a good run on the bank.
Banking regulators had no choice but to seize Silicon Valley Bank's assets to protect the remaining assets and deposits at the bank.
And now, what's next?
Two big problems remain with Silicon Valley Bank, both of which could lead to more problems if not resolved quickly.
The most immediate problem
is Silicon Valley Bank's large deposits.
The federal government insures deposits up to $250,000, but anything above that level is considered uninsured.
The Federal Deposit Insurance Corporation said the insured deposits would be available Monday morning.
However, the vast majority of Silicon Valley Bank's deposits were uninsured, a unique feature of the bank because its clients are mostly startups and wealthy tech workers.
At the moment, all that money is not accessible and will probably have to be released in an orderly process.
But many companies can't wait weeks to gain access to funds.
to cover payroll and office expenses.
This situation
could lead to furloughs or layoffs.
The Federal Reserve prepares a rise in interest rates above expectations
March 8, 202300:44
The second problem is that
there is no potential buyer
for Silicon Valley Bank.
Typically, banking regulators look for a stronger bank to take over the assets of a failing bank, but in this case, another bank has not stepped up.
A bank buying Silicon Valley Bank could go a long way toward solving some of the problems around money that startups can't access right now.
Can what happened in 2008 be repeated?
Not at the moment, and experts
don't expect problems to spread
to the banking sector in general.
Silicon Valley Bank was big but
had a unique existence
, serving almost exclusively the world of technology and venture capital-backed companies.
He did a great job with the particular part of the economy that was hit hard last year.
[The Biden Administration assures that the “resilience” of the banking system will withstand the collapse of Silicon Valley Bank]
Other banks are much more diversified
across multiple industries, customer bases, and geographies.
The Federal Reserve's most recent round of "stress tests" of the largest banks and financial institutions showed that they would all survive a deep recession and a significant rise in unemployment.
However, there could be an economic ripple effect in the Bay Area and in the world of tech startups if the remaining money cannot be released quickly.