The unfortunate collapse of Silicon Valley Bank (SVB) has had a significant impact on the technology and startup ecosystem, drawing attention from the whole technology industry and the rest of the world. Financial institution Silicon Valley Bank (SVB) has established a solid reputation by offering banking services to technology startups, venture capital firms, and other innovation-based businesses. SVB has developed into a significant player in the technological ecosystem, providing banking, advising, and finance services to some of the leading businesses in the sector.
However, the success story of SVB has not been without challenges. The global financial crisis of 2008, which put many financial institutions throughout the world in peril, provided the bank with a specific challenge. SVB had to traverse a challenging period that put its survival and resilience to the test, despite its focus on the computer industry. SVB was not immune to the larger economic forces in play.
In order to understand the narrative of SVB’s near-collapse during the financial crisis, it will be necessary to look at the circumstances that made the bank vulnerable, the actions the bank did to avert a catastrophe, and the lessons that can be drawn from the bank’s experience. We can better comprehend the difficulties that banks have in a volatile environment by taking a closer look at this case study and learning the tactics that can keep them afloat in trying circumstances.
SILICON VALLEY BANK
Silicon Valley Bank (SVB) is a specialised commercial bank that offers financial services to technology and life science companies, as well as to their investors and partners. It was established in 1983 in Santa Clara, California, in the centre of Silicon Valley, and has since developed into a major financial organisation with locations all over the world[1].
The services provided by SVB include a variety of banking products such commercial loans, cash management, foreign exchange, and trade financing as well as specialised services for venture capital and private equity organisations. In order to assist its clients in navigating the complicated financial and commercial environment of the technology and life sciences industries, SVB additionally provides strategic guidance and insights.
According to the Federal Deposit Insurance Corporation, Silicon Valley-based SVB had assets worth $209 billion at the end of 2022. Throughout the years, SVB has established itself as a leading financial partner for high-growth firms in the innovation industry. Several of the most innovative and successful organisations in the world, such as Apple, Google, and LinkedIn, as well as thousands of new startups and mid-sized companies, are among its clientele[2].
SILICON VALLEY BANK: THE COLLAPSE
A little more than half of all venture-backed technology and healthcare companies in the United States received funding from SVB. The reason SVB was a preferred bank for the technology industry was that they backed new businesses that other banks wouldn’t accept because of the greater risks involved.
As consumers spent a lot of money on electronics and digital services during the pandemic in 2020, the market for tech companies was booming. The services of SVB were required at this period for tech companies to hold their funds for operational costs like payroll. Most of these deposits were invested by the bank, as is customary.
Furthermore, many factors contributed to the collapse in which a large number of customers withdrew their savings at once out of concern for the bank’s stability. Many of SVB’s depositors were startup companies. They deposited large amounts of cash from investors because tech was in high demand during the pandemic. Following are the reasons for the collapse:
High Interest Rates
Silicon Valley Bank made significant investments in long-term US treasuries and agency mortgage-backed securities using bank deposits. Nevertheless, as interest rates rise, the value of bonds and treasuries decreases. SVB’s bond portfolio started to decline in 2022 when the Federal Reserve raised interest rates to fight inflation. If SVB had kept the bonds until they were due to mature, it would have made its capital back.
Earlier, Silicon Valley Bank made short-term loans. Instead of using short-term investments to cover their liabilities in 2021, they switched to long-term securities like Treasury bonds in order to increase yield. They were insolvent for months because they could not liquidate their assets without a large loss.
Several bank customers withdrew money when economic considerations affected the IT industry as venture capital began to decline. Due to the fact that these deposits were bound up in long-term investments, SVB lacked the liquidity necessary to liquidate them. They began offering their bonds for sale at a large loss, upsetting buyers and investors. At the end, the bank collapsed 48 hours after disclosing the sale of assets.
Classic Bank Run and Customer Withdrawals
Many got concerned that the bank was short on cash after SVB announced its $1.75 billion capital offering. As word spread, a flood of clients began to withdraw cash. Once SVB announced a capital raise, its stock fell by 60% the next day. Later on, Californian officials closed the bank and transferred SVB to the FDIC.
Clients of SVB have substantially larger balances than those in personal banking. Money quickly ran out during the bank run as a result of the withdrawals’ quickening pace and snowball effect. The majority of consumers had deposits that exceeded the $250,000 FDIC cap.
Many startups chose to leave money in their SVB primary account rather than paying expenses from other accounts, like a money market. This means that the majority of their working capital was mostly held in their SVB account, and they required access to their deposits for payroll and bill payment[3].
IMPACT OF THE COLLAPSE
Several of the shareholders and investors in SVB have seen a large loss in their assets as a result of the recent decline in the SVB stock market. Among the causes of this is the fact that, in contrast to customers, investors are not covered by the Federal Deposit Insurance Corporation (FDIC). A government-run organisation in the US called the FDIC insures depositors in the case of bank failure. This means that, subject to a certain limit, the FDIC will compensate a depositor if a bank where they have a deposit fails. Investors and stockholders, however, are not equally covered by the FDIC.
Another issue that businesses face is lack of sufficient funds to cover immediate expenses such as payroll. This can be particularly difficult for startups and small businesses that may not have a large cash reserve to draw from. As a result, these companies may need to rely on financing options such as loans or lines of credit to cover their expenses.
Furthermore, The FDIC insures most banks, including commercial banks and savings institutions, up to a certain amount per depositor, per account ownership category, and per bank. The current standard insurance amount is $250,000 per depositor, per ownership category, per bank. While this insurance provides some protection to individual depositors, it may not be sufficient for larger business accounts[4].
THE BOTTOM LINE
The collapse of Silicon Valley Bank (SVB), one of the largest supporters of the technology sector, has brought to light the precarious situation that the industry is currently facing. With recessionary conditions looming over the tech sector, larger companies have been forced to cut staff, and startups may now face funding issues as management teams at other banks are hesitant to take on the risk of investing in them.
This recent turn of events highlights the importance of financial management for companies, particularly during times of economic uncertainty. It is crucial for companies to take extra precautions during a recessionary environment, especially with rising interest rates, supply chain issues, and difficulties in raising capital.
For startups, securing funding is essential to their success, and losing support from one of the industry’s biggest supporters will undoubtedly have a significant impact. It may also lead to a domino effect as other banks become hesitant to invest in startups, creating a further strain on the already struggling sector.
Moreover, the tech industry’s vulnerability to economic downturns serves as a reminder that financial management is not just necessary during difficult times but also during periods of growth. When the economy is booming, it can be easy to become complacent and overlook potential risks. However, taking proactive steps to manage finances, such as creating a contingency plan, diversifying funding sources, and maintaining healthy cash flow, can help companies weather unforeseen challenges.
In conclusion, SVB’s collapse serves as a wake-up call for the tech industry and reinforces the importance of sound financial management in both good and bad times. It highlights the need for companies to take extra precautions during uncertain economic periods and to be proactive in managing their finances. By doing so, companies can mitigate risks, maintain stability, and position themselves for long-term success.
[1] Allyn, B., Gura, D., Hirsch, P. and Rosalsky, G. (2023). The Collapse Of Silicon Valley Bank. NPR. https://www.npr.org/sections/money/2023/03/14/1163200179/the-collapse-of-silicon-valley-bank
[2] Magan, V. (2023). SVB Collapse: What Comes Next in Policy & Risk Management for Your Organisation. FiscalNote. https://fiscalnote.com/blog/svb-collapse-policy-risk-management
[3] Hetler, A. (2023). Silicon Valley Bank collapse explained: What you need to know. WhatIs.com. https://www.techtarget.com/whatis/feature/Silicon-Valley-Bank-collapse-explained-What-you-need-to-know#:~:text=SVB%20didn
[4] White, K. (2023). SVB Collapse: Cash Flow Management Resources for Startups. Trovata. https://trovata.io/blog/svb-collapse-cash-management-resources/
