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How does Silicon Valley Bank Collapse? Explained

Silicon Valley Bank collapse

On Friday morning, Silicon Valley Bank, facing a sudden bank run and capital crisis, collapsed. Since Washington Mutual failed in 2008, it was the largest downfall of a US bank. 

Below is everything you need to know about the failure of Silicon Valley Bank. 

What is SVB (Silicon Valley Bank)?

SVB was a commercial bank specialising in financing almost half of US venture-backed healthcare and technology companies.. Founded in 1983, SVB is headquartered in Santa Clara, California. At the time of its failure on 10 March 2023, it was the 16th largest bank in the United States. 

According to the Federal Deposit Insurance Corporation, SVB was one of the top 20 American banks with $209 billion in total assets. 

What Caused Silicon Valley Bank’s Failure?

The reason behind the downfall of SVB is that it encountered a sudden bank run and capital crisis. In other words, various forces collided to take down the bank. A year ago, SVB tamed inflation by introducing the Federal Reserve. 

It led to increased borrowing costs that sapped tech stocks’ momentum that benefited SVB. It also eroded the value of long-term bonds that SVB gobbled up during the era of low and nearly zero interest rates. 

Previously, SVB’s treasury yield was about 1.79%. Currently it is yielding an average of 3.9%. However, venture capital began drying up simultaneously, forcing startups to withdraw funds held by SVB. 

Therefore, we can say that SVB was sitting on a mountain of unrealised bond losses. 

Sold Securities at a Loss

On Wednesday, SVB sold a bunch of securities at a loss. The bank also would have to sell $2.25 billion in new shares to make its balance sheet stronger. As a result, it triggered a panic among key venture capitals. 

On Thursday morning, the bank’s stocks began plummeting. It was also taking the other bank’s shares down by the afternoon. Trading in SVB shares was halted by Friday morning. 

It had also abandoned its efforts of quickly raising capital. And finally, the bank shuts down, placing it in receivership under the FDIC. 

Will this Affect other Banks as well?

For now, the problems appear specific to Silicon Valley Bank. It doesn’t seem at all that it is going to affect other banks as well. Jon Arfstrom, RBC Capital Markets Analyst, said that SVB is in a highly unusual situation without a roadmap. 

CEO of the investment research company, David Trainer, made a statement that other banks may face similar issues. However, other banks are dealing with the loss of their bond portfolios, which is less than the issue SVB was facing. 

On the other hand, most of the bank’s securities holdings are diversified, which leads to reducing their chances of getting into big trouble. 

As consumers scrutinise the interest rates they’re earning on their accounts, banks are forced to pay more on customers’ deposits, significantly wealthier clients and companies. The trouble in switching banks couldn’t lead to severe issues for lenders. 

How Twitter Reacted to SVB Collapsing?

What’s Next?

According to a senior market analyst, Ed Moya, smaller banks that are tied to cash-strapped industries like crypto and tech may be on a rough ride. He added that the Fed’s rate-hiking campaign would break something. And for now, it is taking down small banks. 

The Federal Deposit Insurance Corporation sells failed banks’ assets to other banks by repaying depositors. However, a buyer could still emerge for Silicon Valley Bank, but it will be far from guaranteed. 

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