Silicon Valley Bank Collapse: Explained
On Friday, Silicon Valley Bank, a lender to some of the biggest names in the technology world, became the largest bank to fail since the 2008 financial crisis. The move put nearly $175 billion in customer deposits under the control of the Federal Deposit Insurance Corp. Here’s what we know so far about this developing story.
Regulators take over the bank.
The California Department of Financial Protection and Innovation shut down Silicon Valley Bank on Friday, less than two days after the bank tried to persuade clients not to pull their money over concerns it was running low on available cash. The regulator appointed the Federal Deposit Insurance Corp. as the receiver.
The FDIC created a new bank, the National Bank of Santa Clara, to hold the deposits and other assets of the failed one. The agency said in a news release that the new entity would be operating by Monday morning and that checks issued by the old bank would continue to clear.
Bank was caught by higher interest rates.
Flush with cash from high-flying startups, Silicon Valley Bank bought vast amounts of bonds more than a year ago. Like other banks, Silicon Valley Bank kept a small amount of the deposits on hand and invested the rest hoping to earn a return.
That had worked well until the Federal Reserve began raising interest rates last year to cool inflation. At the same time, startup funding started to dry up, putting pressure on many of the bank’s clients — who then began to withdraw their money. To pay those requests, Silicon Valley Bank was forced to sell off some of its investments at a time when their value had declined. In its surprise disclosure on Wednesday, the bank said it had lost nearly $2 billion.
Bank’s failure is raising concerns about other banks.
Silicon Valley Bank is small by comparison with the nation’s largest banks — it’s $209 billion in assets pales next to the more than $3 trillion at JPMorgan Chase. But bank runs can happen when customers or investors panic and pull their deposits. Perhaps the most immediate concern late this week was that the failure of Silicon Valley Bank would scare off customers of other banks.
Shares of First Republic Bank, based in San Francisco, and Signature Bank in New York were down more than 20% on Friday. But shares of some of the nation’s largest banks including JPMorgan, Wells Fargo and Citigroup, nudged higher on Friday after a slump on Thursday.
Young companies scramble to get their money out of the bank.
As the startup ecosystem tries to make sense of Silicon Valley Bank’s implosion, some entrepreneurs whose funds are frozen at the bank are turning to loans to make payroll. SVB provided banking services to nearly half of venture capital-backed technology and life-science companies, according to its website, and over 2,500 venture capital firms, including Lightspeed, Bain Capital and Insight Partners.
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