Silicon Valley Bank (SVB), the US’s leading bank for tech startups, collapsed last Friday due to a sudden bank run and capital crisis. It was seized by federal regulators, marking the biggest failure of a US bank since 2008. SVB, founded in 1983, provided financing for almost half of US venture-backed tech and health care companies. Despite it only being known in Silicon Valley, SVB was among the top 20 American commercial banks, boasting $209bn in total assets at the close of last year, according to the FDIC.
SVB collapsed due to a range of issues. In June 2017, the Federal Reserve began aggressively raising interest rates to counteract inflation. Higher borrowing costs hit the momentum of tech stocks benefiting SVB and eroded the worth of long-term bonds that SVB and other banks had purchased in ultra-low interest rate environments. SVB’s $21bn bond portfolio had been yielding an average of 1.79%, whereas the current 10-year Treasury yield is approximately 3.9%. A lack of venture capital saw startups withdrawing funds held by SVB, which held a mountain of unrealised losses in bonds, just as the speed of customer withdrawals increased.
The bank’s announcement on Wednesday that it had sold a batch of securities and would sell $2.25bn in new shares to strengthen its balance sheet triggered a panic among venture capital firms, which advised companies to withdraw money from the bank. On Thursday, SVB’s stock crashed, resulting in a repeat of the 2007-2008 financial crisis. By Friday, trading in SVB shares was suspended, the bank had given up attempts to intensively raise capital or to find a buyer, and California regulators intervened, putting the bank in receivership under the Federal Deposit Insurance Corporation.
Although SVB’s collapse will not have a profound effect on Silicon Valley’s overall economy, it will result in the bank’s high-powered customers being left in limbo. While the bank’s 30,000 customers will keep their deposits (FDIC-insured up to $250,000), some of its 9,000 employees will likely lose their jobs. Furthermore, the fall of industry-led SVB suggests that the US is beginning to suffer from losses in the tech sector.
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