Silicon Valley Bank's Failure Raises Concerns for Tech Industry and Banking System
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 bank's collapse has sent shockwaves through the tech industry, Wall Street, and Washington, raising concerns about the stability of the banking system and the health of the tech sector.
Silicon Valley Bank provided banking services to nearly half of the country's venture capital-backed technology and life-science companies, according to its website, and to over 2,500 venture capital firms. Its swift collapse has left its clients in a difficult position, with many rushing to withdraw their funds before the bank's failure.
Here's what we know so far about this developing story and what brought Silicon Valley Bank to this point.
The Bank Took On Too Many Huge Deposits, and It Was Caught by Higher Interest Rates
Flush with cash from start-ups, Silicon Valley Bank invested its deposits in long-term debt like Treasury bonds, which promised steady, modest returns when interest rates remained low. However, the bank had not considered what was happening in the broader economy, which was overheated after more than a year of pandemic stimulus.
This meant that Silicon Valley Bank was caught off guard when the Federal Reserve started raising interest rates to combat rapid inflation. The once-safe investments looked a lot less attractive as newer government bonds kicked off more interest.
In addition, start-up funding was starting to dwindle, leading Silicon Valley Bank's clients — a mixture of technology start-ups and their executives — to begin withdrawing their money. To fulfill its customers' requests, the bank had to sell some of its investments at a steep discount.
The Bank Was Unique in Ways That Contributed to Its Rapid Demise
Not all of Silicon Valley Bank's problems are linked to rising interest rates. The bank was unique in ways that contributed to its rapid demise. The Federal Deposit Insurance Corporation (FDIC) only insures amounts up to $250,000, so anything more than that would not have the same government protection. Silicon Valley Bank had a significant number of big and uninsured depositors — the kind of investors who tend to withdraw their money during signs of turbulence.
Once Silicon Valley revealed its huge loss on Wednesday, the tech industry panicked, and start-ups rushed to pull out their money. After the run on the bank, the FDIC took it over last week, putting about $175 billion in customer deposits under the control of the federal regulator.
The Bank's Failure Has Raised Concerns About Other Institutions
Silicon Valley Bank is small compared with the nation's largest banks — its $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 start pulling their deposits. The failure of Silicon Valley Bank has raised concerns that it could scare off customers of other banks, leading to a wider crisis in the banking system.
Regulators Rush to Contain the Fallout
Regulators have been rushing to contain the fallout from Silicon Valley Bank's failure, especially before markets reopen on Monday and the business week begins.
Treasury Secretary Janet L. Yellen said regulators had been working over the weekend to stabilize the bank and assure the public that the broader American banking system was "safe and well capitalized." At the same time, she acknowledged that many small businesses were counting on funds tied up at the bank.
Ms. Yellen suggested that a possible solution could be an acquisition of Silicon Valley Bank, emphasizing that regulators were trying to address the situation "in a timely way." According to a person familiar with the matter, the FDIC on Saturday started an auction for Silicon Valley Bank that was set to wrap up Sunday afternoon.