Till about a week ago, Silicon Valley Bank (SVB) was among the leading banks serving the large technology and startup ecosystem in the United States (US). According to the lender, it had business with 44 per cent of US venture-backed technology and healthcare IPOs.
But, by Friday, the bank had been shut down by the California Department of Financial Protection and Innovation.
The Santa Clara, California-based bank had $212 billion in assets as of October-December 2022 quarter. This is small compared with some of the largest banks like JP Morgan Chase, which had assets worth over $3 trillion.
Still its collapse marked the largest bank failure since the financial crisis of 2008.
It was the first FDIC-insured institution to fail after Almena State Bank in Kansas in October 2020.
Why did Silicon Valley bank fail?
The bank amassed huge amounts of deposits in 2021. SVB, like other banks, invested a large part of this amount in bonds. In 2021, interest rates were at their record low and money was easily available as central banks, including the Federal Reserve pumped ample liquidity in the system in a bid to revive pandemic hit economy.
But, the situation changed in 2022. A rapid surge in inflation led Fed and other central banks change course. Interest rates rose sharply, liquidity in the system was being sucked up fast.
Amid rising interest rates and a slowing economy, a funding winter set in and startups started finding it difficult to raise funds. They began falling back on their deposits.
Typically when interest rates rise, bond prices fall and vice-versa.
SVB couldn't stop depositors from withdrawing their money. So, it had to sell some of the bonds it had bought, even if it meant incurring a loss.
By Wednesday, SVB said it had sold $21 billion worth of bonds at a loss of around $1.8 billion.
Its share price was falling and more people had started withdrawing their deposits from the bank.
Eventually, the California Department of Financial Protection and Innovation stepped in and shut the bank down to avoid a contagion.
Will people get their deposits back?
The Federal Deposit Insurance Corporation (FDIC) has been appointed as the receiver.
To protect insured depositors, a new bank - Deposit Insurance National Bank of Santa Clara (DINB) - has been created. All insured deposits have been transferred to this new bank.
Silicon Valley Bank had 17 branches in California and Massachusetts. The main office and branches will open on Monday, March 13.
All insured depositors will have full access to their deposits.
As of December 31, 2022, SVB had about $175.4 billion in total deposits. The amount of uninsured deposits was yet to be determined.
What happens to uninsured depositors?
The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will also receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC is able to sell SVB's assets, future dividends may be paid to uninsured depositors.
What experts said on SVB Bank collapse?
Uday Kotak, the CEO of Kotak Mahindra Bank blamed the crisis on the sharp rise in interest rates.
"Markets, analysts, investors underestimate the importance of financial stability for the balance sheet of a bank. When interest rates move up 500 bps from zero in a year, an accident was waiting to happen somewhere," said Kotak.
Billionaire investor and hedge fund manager Bill Ackman felt the failure of SVB could " destroy an important long-term driver of the economy" as venture capital-backed companies relied on the bank for loans and holding their operating cash.
"If private capital can’t provide a solution, a highly dilutive government preferred bailout should be considered," he said.
Will SVB collapse spread across the financial system?
Analysts have said there is unlikely to be a contagion effect on other banks or the wider financial services sector. But, considering it serviced so many startup and tech companies, and their deposits are now stuck, they could face some cash crunch.
For instance, Roku, which makes streaming devices, has said around $487 million or 26 per cent of its cash reserves are stuck as they were in uninsured deposits with SVB. There could be many other companies in a similar situation.
How things pan out over next few weeks will be crucial.
