On Friday, March 10th, the Silicon Valley Bank faced a collapse within 48 hours. The go-to bank for U.S. tech startups and healthcare companies came crashing down, leaving its customers in limbo and without answers. The bank was facing a capital crisis and finally fell victim on Friday morning and was taken over by federal regulators.
This event marks the most significant failure of a U.S. bank since Washington Mutual collapsed in 2008. The bank failure was sped up on Friday morning when depositors rushed to withdraw money in concern about the bank's health. This rapid depletion of accounts led to its demise.
The bank had been suffering from the decline in the value of technology stocks and industry layoffs on which it relied on.
The Federal Reserve raised inflation rates a year ago to slow down inflation. With the Fed moving quickly and aggressively, the higher borrowing costs hurt tech stocks which the bank initially benefited from.
These high-interest rates also eroded long-term bonds' value. As venture capital began drying up, startups that used the bank were forced to draw on funds held by the bank. They started gaining a high number of losses in bonds because they couldn't keep up with the pace at which their customers were withdrawing. This strain put the bank in a challenging situation.
On Wednesday, the bank announced that they had sold several securities at a loss and would sell $2.25 billion in new shares to balance their sheet. This announcement triggered a panic among key venture capital firms, who began advising their companies to withdraw their money from the bank.
The banks' shares fell 60% on Thursday and dropped another 60% on Friday morning. These drops forced the bank to sell $1.75 billion in shares to compensate for declining customer deposits.
By Friday morning, there was not much hope of recovering. Trading bank shares stopped, and efforts to raise capital or find a buyer stopped. At this point, California regulators intervened and shut the bank down, placing receivership to the Federal Deposit Insurance Corporation.
The collapse of Silicon Valley Bank leaves venture firms and their portfolio companies needing answers. The failure leaves these companies questioning cash flow and access as bank regulators begin to take over. The bank was known for working with over half of all U.S.-based startups.
As of December 31st, the bank held $175.4 billion in deposits; 93% of those were uninsured, according to regulatory filings. This money being in limbo leaves several companies unable to make payroll, rent, or pay renders if these funds remain inaccessible.
Regulators said insured deposits of up to $250,000 held at Silicon Valley Bank are protected, and uninsured depositors will receive an unspecified amount next week. However, as the bank assets are sold, uninsured depositors may receive future payments.
There is controversy on whether this bank collapse will spark a broader contagion as it did with Washington in 2008. While this is unlikely, smaller banks tied to tech and crypto industries may take a hit.
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