The collapse of Silicon Valley Bank (SVB) had a significant effect on the business lending landscape in the area, leading to a decrease in the availability of capital for small businesses.

The bank failed due to a bank run, when many customers withdrew their funds at the same time. When the bank couldn't meet the demand, regulators shut it down.

March 13th 2023.

What caused

Silicon Valley Bank to fail?

There is a simple answer and a complex answer to why the bank failed. The simple answer is that it experienced a bank run and didn’t have the money on hand to cover withdrawals. A bank run is when many depositors withdraw their funds at the same time. When the bank couldn’t produce the funds to cover withdrawals, regulators stepped in and closed the bank.

The complex answer takes a wider and more complicated view as to why SVB was unprepared for a bank run. Ever since the financial crisis of 2008, interest rates have remained low. For a time, Federal Reserve chair Jerome Powell, set a zero-interest rate policy .

While interest rates were zero percent, the startups and tech firms that were SVB’s main customers experienced periods of significant cash intake. SVBs bank deposits grew as IPOs, SPACs, and VC investment exploded at a rapid

pace.

However, this meant that the bank’s customers didn’t need loans or financing – and loans are how banks make money. In the simplest terms, a bank takes deposits and issues loans, and makes profit from loan interest. But with fewer clients needing loans and all this cash on hand from deposits, SVB needed other ways to make money.

So, it began to purchase long-term government securities. The issue with this method is that if interest rates went up, those securities lost value. Instead of being able to make money with credit risks, like loans, SVB turned to interest risks with securities. When the Fed began hiking interest rates to curb inflation, SVB’s security holdings began to decrease in value.

Another effect of interest rate hikes was the VC firms stopped throwing money at tech startups as freely. Many of these businesses then needed to dip into their own pocket by accessing their funds deposited with the bank.

SVB moved to quickly free up liquidity to cover what customers were taking out. It sold $21 billion worth of securities, causing a $1.8 billion loss after taxes. It also announced a plan to shore itself up by selling $2.2 billion in shares, prompting Moody’s to downgrade its credit rating.

When SVB presented its slide deck explaining the situation on March 8, 2023, customers began exiting in droves. Peter Thiel’s Founder’s Fund advised its portfolio customers to withdraw. Other VC firms, like Union Square Ventures and Coatue Management, told their companies to pull

out as well.

The bank run happened in less than two days. The largely digital platform allowed customers to pull their funds out electronically, and SVB didn’t have a chance to intervene or quell the panic. On March 9, 2023, customers attempted to withdraw $42 billion – nearly a quarter of the bank’s deposit holdings. The share sale was canceled and SVB attempted to sell itself.

By Friday March 10, 2023, regulators stepped in, and the bank closed.

Will the SVB failure spread to the other banks?

The SVB collapse has all the makings for the trigger event for a full-blown financial crisis, but steps are being taken to stop the spread before that happens. Images of the bank’s closing and customers standing outside the doors are sure to remind people the bank runs on infamous Black Tuesday that kicked off the Great Depression – as depicted in the movie It’s a Wonderful Life.

Fortunately, depression-era protections, such as the Federal Deposit Insurance Company , and government intervention can help stem the tide of panic. One of the most significant steps the government took was announcing on Sunday, March 12, 2023, that all SVB deposit customers would be able to access their money on Monday, March 13, 2023. This includes customers whose holdings exceeded the FDIC insured amount of $250,000.

The actions taken will hopefully prevent more bank runs and closings. However, one bank, the NY-based Signature Bank, also failed. With $110 billion in assets, it’s the third largest bank failure in US history.

The FDIC created a new entity, the Deposit Insurance National Bank of Santa Clara. All insured deposits were transferred, and the bank is set to open on Monday, March 13, 2023.

What caused

Silicon Valley Bank to fail?

There is a simple answer and a complex answer to why the bank failed. The simple answer is that it experienced a bank run and didn’t have the necessary funds on hand to cover withdrawals. A bank run is when numerous depositors withdraw their money at the same time. When the bank couldn’t produce the money to cover the withdrawals, regulators stepped in and closed the bank.

The complex answer takes a more comprehensive and intricate view as to why SVB was unprepared for a bank run. Ever since the financial crisis of 2008, interest rates have remained low. For a time, Federal Reserve chair Jerome Powell, set a zero-interest rate policy.

While interest rates were zero percent, the startups and tech companies that were SVB’s main customers experienced a period of considerable cash intake. Consequently, SVB’s bank deposits grew as IPOs, SPACs, and VC investment escalated rapidly.

However, this meant that the bank’s customers didn’t need loans or financing – and loans are how banks make money. In the most basic terms, a bank takes deposits and issues loans, and earns a profit from the loan interest. But with fewer clients needing loans and all this cash on hand from deposits, SVB needed to find other ways to make money.

So, it started to buy long-term government securities. The issue with this method is that if interest rates rose, those securities lost value. Instead of being able to make money with credit risks, like loans, SVB turned to interest risks with securities. When the Fed began increasing interest rates to curb inflation, SVB’s security holdings began to decrease in value.

Another effect of interest rate hikes was that VC firms stopped throwing money at tech startups so freely. Many of these businesses then needed to dip into their own pockets by accessing their funds deposited with the bank.

SVB moved quickly to free up liquidity to cover what customers were taking out. It sold $21 billion worth of securities, resulting in a $1.8 billion loss after taxes. It also announced a plan to shore itself up by selling $2.2 billion in shares, prompting Moody’s to downgrade its credit rating.

When SVB presented its slide deck explaining the situation on March 8, 2023, customers began leaving in large numbers. Peter Thiel’s Founder’s Fund advised its portfolio customers to withdraw. Other VC firms, such as Union Square Ventures and Coatue Management, told their companies to pull out as well.

The bank run happened in less than two days. The largely digital platform allowed customers to take out their funds electronically, and SVB didn’t have the opportunity to intervene or ease the panic. On March 9, 2023, customers attempted to withdraw $42 billion – almost a quarter of the bank’s deposit holdings. The share sale was canceled and SVB attempted to sell itself.

By Friday March 10, 2023, regulators stepped in, and the bank closed.

Will the SVB failure spread to the other banks?

The SVB collapse has all the characteristics for the trigger event for a full-blown financial crisis, but measures are being taken to prevent the spread before that happens. Images of the bank’s closing and customers standing outside the doors are certain to bring back memories of the bank runs on infamous Black Tuesday that initiated the Great Depression – as portrayed in the film It’s a Wonderful Life.

Fortunately, depression-era protections, such as the Federal Deposit Insurance Company , and government intervention can help stop the tide of panic. One of the most significant steps the government took was announcing on Sunday, March 12, 2023, that all SVB deposit customers would be able to access their money on Monday, March 13, 2023. This includes customers whose holdings exceeded the FDIC insured amount of $250,000.

The actions taken will hopefully prevent more bank runs and closings. However, one bank, the NY-based Signature Bank, also failed. With $110 billion in assets, it’s the third largest bank failure in US history.

The FDIC created a new entity, the Deposit Insurance National Bank of Santa Clara. All insured deposits were transferred, and the bank is set to open on Monday, March 13, 2023.

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