Silicon Valley Bank (SVB), was shut down by California’s state banking regulator on March 10 after experiencing a rash, swift collapse, which made it the second-largest bank failure in US history.
The incident has sent tremors across the tech industry. SVB’s demise was caused by the withdrawal of money from the bank earlier in the week by many companies and individuals. However, not everyone was able to withdraw their cash, and the FDIC only insures deposits up to $250,000, so customers who had more in SVB are in trouble.
Over the weekend, the British government struggled to limit the impact Silicon Valley Bank (SVB) had on the UK’s SME sector after it collapsed. HSBC’s intervention will mitigate some of the fallout of the collapse for some of the UK’s most promising companies. Experts believe it was similar to the 2008 financial crisis in the United States. And if you’re having trouble understanding what’s happening? Here are answers to some standard questions which might help.
Q1: What and how big is SVB?
Founded in 1983 in Santa Clara, California, Silicon Valley Bank quickly became the bank for the fast-growing tech sector and those who financed it. Offering venture debt and other loans to startups, as well as providing banking services and loans to venture capital firms, it calls itself a “financial partner of the innovation economy.” Several publicly-traded tech companies, such as Roblox and Roku, are also customers.
Q2: How did SVB collapse?
The SVB crisis emerged while the repercussions of Silvergate Bank’s “wind down” were still unfolding. This week, Silicon Valley Bank was ultimately defeated by a good old-fashioned bank run after signs of trouble began to emerge. Customers deposit money with the bank, which invests it in bonds, which are generally safe investments. As the Federal Reserve has increased interest rates, those bonds have become less valuable. As a result of the slowdown in venture capital and tech more broadly, deposit inflows slowed, and clients began withdrawing their funds.
After selling $21 billion of securities from its portfolio at a loss of nearly $2 billion, SVB Financial Group, SVB’s parent company, announced a $2.25 billion share sale on Wednesday, March 8.
Shares of SVB Financial fell on Thursday, and by Friday morning, trading had been halted and there were reports that SVB was considering selling. Some big-name venture capitalists, such as Peter Thiel and Union Square Ventures, began telling their clients to withdraw their money from the bank.
“People freaked out, and unfortunately, it would appear it was justified,” said Alexander Yokum, an analyst at CFRA Research who covers banking. The bank was shut down by regulators by midday Friday.
Q3: What implications does this have for tech companies in the near future?
Those tech companies with money in SVB who haven’t gotten it out yet face a ‘Very Big Question’ that lacks obvious answers: How do I pay my employees?
Depending on the size of the company, the FDIC will guarantee deposits of up to $250,000.
Knock-on effects are also a concern: Even if your startup doesn’t operate with SVB, your suppliers might, so they may not be able to provide the services you need. There could be some stress for many people near-term even if SVB is quickly acquired by another bank and funds start flowing again.
Q4: Why was SVB so important to tech companies?
Founded nearly 40 years ago by two founders in a poker game, the firm has grown into the most important financial institution for the nascent tech industry, serving half of all venture-backed companies in the US and 44% of the technology and healthcare companies that went public last year. The company offered a wide range of services, including standard checking accounts, VC investments, loans, and currency risk management.
In contrast to other banks, SVB was willing to work with tech startups in ways other banks might not have, such as helping early employees with home loans.
Reportedly SVB was extremely relaxed when providing loans to tech startups. Besides charging interest, SVB often received stock warrants that could pay off if a startup was acquired or went public. If tech boomed, the downside was limited: Even failed companies paid back SVB’s loans before other investors, and the pipeline of tech companies using their services was steady.
Q5: How does FDIC insurance work? Are SVB customers going to get their $250,000 back?
As a result of the Great Depression, when many banks collapsed and their customers lost all their money, the Federal Deposit Insurance Corporation was established to provide stability to the American banking system and protect consumers. If a member bank fails, its deposits – your money – are still insured up to $250,000. Despite not being wiped out, anything over $250,000 in that bank is not insured, and its return is not guaranteed. Member banks pay FDIC fees for services.