Silicon Valley Bank (SVB), one of the most respected banks in Silicon Valley, has shut down in what was the second-biggest crash in US banking history. The bank's customers were mainly startups and venture capitalists, and when the bank ran out of cash, it triggered a bank run that led to the bank's closure.
In this article, we will explore what happened to Silicon Valley Bank and why it went bankrupt. We will also discuss the consequences of the bank's closure. This is SVB Explained.
This article is based on a YouTube video, if you want the full analysis, please make sure you check out the video below, the article continues under the video.
The Pandemic and Silicon Valley Bank
When the pandemic hit in Q1 2020, the startup ecosystem was thriving, and there was a lot of money flowing in. Silicon Valley Bank had $60 billion in deposits at the time. By the beginning of 2022, that number had skyrocketed to $200 billion.
While having a lot of cash in the bank is usually a good thing, it created a problem for Silicon Valley Bank. Banks make money by getting money in and then lending it out to borrowers. With so much money in the bank, there were few borrowers who wanted loans.
To balance out all the deposits, Silicon Valley Bank began buying the safest securities it could find, long-term US Treasurys and government-backed mortgage securities. From the start of 2020 to the end of 2021, the bank's holdings of these securities went from $27 billion to $128 billion.
The Trouble Begins
In 2022, interest rates began to increase rapidly, and Silicon Valley Bank found itself in trouble. While the securities were safe, they were low-interest and not very attractive to buyers. With deposits starting to go down, Silicon Valley Bank needed to sell the securities, but they took a big hit on the sale.
In a press release, the bank announced that it had sold a large chunk of these securities and had lost $1.8 billion on the sale. It also announced that it would raise $2.25 billion in capital. However, the press release did not provide enough information about why the bank was raising money and how bad the situation was.
The Panic Sets In
The lack of information caused panic among Silicon Valley Bank's customers, who were mainly startups and venture capitalists. The bank's CEO, Greg Becker, tried to calm the situation by assuring customers that the bank had enough money, but his comments only made things worse.
With customers withdrawing their money in droves, the bank found itself in a literal run on the bank. In just 48 hours, the bank went bankrupt, erasing the 40-year-old bank from existence.
Consequences of Silicon Valley Bank's Closure
FDIC has taken over Silicon Valley Bank and controls it fully. Deposits under $250k are insured, and those over $250k will receive a receivership certificate and an advanced dividend within the next week. The fate of startups that borrowed from SVB or used their credit lines is still uncertain.
The biggest problem for startups is time, and even if the money is recovered, there might be short-term consequences. About half of all US venture-backed startups banked at Silicon Valley Bank, so the closure will have severe consequences for the startup ecosystem.
Silicon Valley Bank's bankruptcy is a significant blow to the entire startup ecosystem, and the consequences of its closure will be severe. While there is still some speculation about what will happen, authorities are doing everything they can to ensure that depositors get their money back.
It is clear that startups will have to find new banks to do business with, and the closure of Silicon Valley Bank will have long-lasting effects on the startup ecosystem. However, it is also clear that authorities are working hard to ensure that the consequences are not too severe.