Silicon Valley Bank, a major lender to the tech industry, collapsed on Friday, March 10th, 2023, in what was the second-largest failure of a financial institution in US history. The bank was closed down by California regulators and placed under the control of the US Federal Deposit Insurance Corporation (FDIC). The FDIC will act as a receiver and liquidate the bank’s assets to pay back its customers, including depositors and creditors.
The collapse followed a 48-hour period in which a bank run and a capital crisis led to panic among investors and key venture capital firms, who reportedly advised companies to withdraw their money from the bank. SVB announced on Wednesday, March 8th, that it had sold a bunch of securities at a loss and that it would sell $2.25 billion in new shares to shore up its balance sheet. The announcement triggered a panic, and the company’s stock cratered on Thursday, dragging other banks down with it. By Friday morning, SVB’s shares were halted, and it had abandoned efforts to quickly raise capital or find a buyer.
The collapse of Silicon Valley Bank has echoes of the 2008 financial crisis, but analysts say it is unlikely to set off a similar domino effect. However, smaller banks that are disproportionately tied to cash-strapped industries like tech and crypto may be in for a rough ride. SVB was among the top 20 American commercial banks, with $209 billion in total assets at the end of last year, according to the FDIC. It is the largest lender to fail since Washington Mutual collapsed in 2008.
The decline of Silicon Valley Bank partly stems from the Federal Reserve’s aggressive interest rate hikes over the past year. Banks loaded up on long-dated, seemingly low-risk Treasuries when interest rates were near zero. But as the Fed raises interest rates to fight inflation, the value of those assets has fallen, leaving banks sitting on unrealized losses. Higher rates hit tech especially hard, undercutting the value of tech stocks and making it tough to raise funds. That prompted many tech firms to draw down the deposits they held at SVB to fund their operations. “Higher rates have also lowered the value of their treasury and other securities which SVB needed to pay depositors,” said Moody’s chief economist Mark Zandi. “All of this set off the run on their deposits that forced the FDIC to takeover SVB.”
Federal regulators sought to reassure the public about the health of the banking system after the sudden collapse of SVB. Treasury Secretary Janet Yellen convened an unscheduled meeting of financial regulators to discuss the implosion of Silicon Valley Bank. Deputy Treasury Secretary Wally Adeyemo said the Dodd-Frank financial reform overhaul has given regulators the tools they need to address this and improved the capitalization of banks. Adeyemo declined to predict what, if any, impact there will be to the broader economy or the tech industry.
While the collapse of Silicon Valley Bank may be an “idiosyncratic situation,” according to Wells Fargo senior bank analyst Mike Mayo, it has still caused concern among investors and raised questions about the health of the banking system.