Vidostream | News, sport and opinion from the Vidostream's US edition

https://vidostream.com

What caused the Silicon Valley Bank failure, and what might happen next

SVB was brought down by the oldest issue in banking — a run on the bank

Vehicles are parked outside a Silicon Valley Bank branch in Wellesley, Mass., on Saturday. (Peter Morgan/The Associated Press)

Vehicles are parked outside a Silicon Valley Bank branch in Wellesley, Mass., on Saturday. (Peter Morgan/The Associated Press)

The financial institution best known for its relationships with high-flying tech startups and venture capital firms, Silicon Valley Bank, experienced one of the oldest problems in banking — a bank run — which led to its failure on Friday.

Its downfall is the largest failure of a financial institution in the United States since Washington Mutual collapsed at the height of the financial crisis more than a decade ago. And it had immediate effects.

Some startups that had ties to the bank scrambled to pay their workers, and feared they might have to pause projects or lay off employees until they could access their funds.

California Gov. Gavin Newsom said Saturday that he's talking with the White House to help "stabilize the situation as quickly as possible, to protect jobs, people's livelihoods, and the entire innovation ecosystem that has served as a tent pole for our economy."

How did this happen? Here's what to know about why the bank failed, who was affected most, and what to know about how it may, and may not affect, the wider banking system in the U.S.

Why it failed

Silicon Valley Bank was hit hard by the downturn in technology stocks over the past year as well as the U.S. Federal Reserve's aggressive plan to increase interest rates to combat inflation.
 

A view of the outside of a bank.
Vehicles are parked outside a Silicon Valley Bank branch in Wellesley, Mass., on Saturday. (Peter Morgan/The Associated Press)


The bank bought billions of dollars worth of bonds over the past couple of years, using customers' deposits as a typical bank would normally operate. These investments are typically safe, but the value of those investments fell because they paid lower interest rates than what a comparable bond would pay if issued in today's higher interest rate environment.

Typically that's not an issue, because banks hold onto those for a long time — unless they have to sell them in an emergency.

But Silicon Valley's customers were largely startups and other tech-centric companies that started needing cash more over the past year. Venture capital funding was drying up, companies were not able to get additional rounds of funding for unprofitable businesses, and therefore had to tap their existing funds — often deposited with Silicon Valley Bank, which sat in the centre of the tech startup universe.

So Silicon Valley customers started withdrawing their deposits. Initially that wasn't a huge issue, but the withdrawals started requiring the bank to start selling its own assets to meet customer withdrawal requests. Because Silicon Valley customers were largely businesses and the wealthy, they likely were more fearful of a bank failure since their deposits were over $250,000 US, which is the U.S. government-imposed limit on deposit insurance.

That required selling typically safe bonds at a loss, and those losses added up to the point that Silicon Valley Bank became effectively insolvent. The bank tried to raise additional capital through outside investors, but was unable to find them.

The fancy tech-focused bank was brought down by the oldest issue in banking — a run on the bank.
 

The main entrance to a bank in Menlo Park, Calif.
The entrance to a Silicon Valley Bank in Menlo Park, Calif., is seen on Friday. (Michaela Vatcheva/Reuters)


Bank regulators had to seize Silicon Valley Bank's assets to protect the assets and deposits remaining at the bank.

San Francisco-based employee performance management company Confirm.com was among the Silicon Valley Bank depositors that rushed to pull their money out before regulators seized the bank.

Co-founder David Murray credits an email from one of Confirm's venture capital investors, which urged the company to withdraw its funds "immediately," citing signs of a run on the bank.

Such actions accelerated the flight of cash, which led to the bank's collapse.

What happens next?

There are two large problems remaining with Silicon Valley Bank. Both could lead to further issues if not resolved quickly.

The most immediate problem is Silicon Valley Bank's large deposits. The U.S. government insures deposits to $250,000, but anything above that level is considered uninsured. The Federal Deposit Insurance Corporation said insured deposits would be available on Monday morning. However the vast majority of Silicon Valley Bank's deposits were uninsured, a unique characteristic of the bank due to its customers being largely startups and wealthy tech workers.
 

People standing outside of a bank.
People stand outside of an entrance to Silicon Valley Bank in Santa Clara, Calif., on Friday. (Jeff Chiu/The Associated Press)


At the moment, all of that money can't be accessed and likely will have to be released in an orderly process. But many businesses cannot wait weeks to access funds to meet payroll and office expenses.

Tara Fung, co-founder and CEO of tech startup Co:Create, said her firm uses multiple banks besides Silicon Valley Bank and was able switch over its payroll and vendor payments to another bank. 

Her firm chose the bank as a partner because it is the "gold standard for tech firms and banking partnerships," and she was upset that some people seemed to be gloating about its failure.

A second key problem is there's no buyer of Silicon Valley Bank. Typically bank regulators look for a stronger bank to take on the assets of a failing bank, but in this case, another bank hasn't stepped forward.

A bank buying Silicon Valley Bank could go a long way to resolving some of the problems tied with the money that startups can't access right now.

Any sign of a repeat of 2008?

At the moment, no, and experts don't expect there to be any issues spreading to the broader banking sector.

Silicon Valley Bank was large but had a unique existence by servicing nearly exclusively the technology world and VC-backed companies. It did a lot of work with the particular part of the economy that was hit hard in the past year.

Other banks are far more diversified across multiple industries, customer bases and geographies. The most recent round of "stress tests" by the Federal Reserve of the largest banks and financial institutions showed that all of them would survive a deep recession and a significant drop in unemployment.

However there might be economic ripple effects in the Bay Area and in the technology startup world if the remaining money can't be released quickly.

Author: Editors Desk

Source: CBC News:

We are using cookies to give you the best experience on our website. By continuing to browse, you are agreeing to our Cookie Policy.
You did not use the site, Click here to remain logged. Timeout: 60 second