Understanding the Silicon Valley Bank Collapse

What Happened to Silicon Valley Bank?

Silicon Valley Bank (SVB) was the primary financial institution for most American tech startups, and many international startups, from its inception in 1983 until its recent collapse in early 2023. The bank provided loans for high-risk startups that were easily adaptable to delayed earnings and eventually established itself as the premier bank for tech entrepreneurs and their ventures. At the end of 2022, SVB had $212 billion in assets under management and $74 billion in total loans. So how did one of the global leaders in tech startup banking go from these impressive numbers to filing for bankruptcy just a few months ago? Let's take a look.

General Timeline of the Collapse

As with most banks, SVB consistently purchased US Treasury Bonds as a safe asset class. This practice works well as long as these bonds are held to maturity and as long as interest rates are not raised at a rapid pace. As the federal government raised interest rates to curb inflation in late 2022 and early 2023, the value of SVB’s bonds fell drastically, which caused the bank to lose money when they had to sell the bonds for less than they purchased them. The following timeline, as first reported by Axios, shows what happened next as SVB tried to raise money to cover its losses:

March 8: SVB announces it has raised $500 million and plans to raise $1.25 billion more in a common stock sale. Depositors begin to worry about the safety of their deposits.

March 9: When the markets open SVB stock falls by 30%; by the end of the day the stock falls by a total of 60%. Depositors begin to pull their money. Withdrawals from SVB total $42 billion, making it one of the largest bank runs in history.

March 10: US regulators take control of the bank.

March 13: SBV’s UK arm is sold to HSBC for £1.

March 17: SVB Financial Group files for Ch. 11 bankruptcy protection.

March 27: First Citizens Bank announces plans to buy SVB at a steep discount of $16.5 billion.

Following these events, more banks failed at home and abroad, including the large Swiss bank Credit Suisse, though the fall of Credit Suisse can be partially attributed to internal scandals.

Reactions to the Collapse of SVB

Initial reactions to the collapse of SVB were as expected. Venture capitalists called clients to get them to take their money out of the bank as fast as possible while SVB executives asked for everyone to remain calm and for funding. The US government responded by creating a bridge bank within the FDIC to ensure that all deposits would be available to depositors. The FDIC stated that “no losses associated with the resolution of Silicon Valley Bank will be borne by taxpayers…Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.”

Lessons to Learn from the Collapse of Silicon Valley Bank

While individuals and businesses are very different from multi-billion dollar banks, there are many lessons to be learned from the collapse of SVB.

1. Choose who you bank with wisely. It may not always be the best idea to follow the crowd, so be sure to do your due diligence on who you are banking and investing with.

2. Select investments that are resistant to steep changes in the market. While it’s impossible to predict what the market will do, it is possible to select safe investment strategies that provide minimal downside in the event of unfavorable market conditions.

3. Protect your business and your wealth. Having the proper legal business entities, trusts, and wills can help you be sure that you and your family have done all you can to retain your assets even in the worst of times.