What happened at Silicon Valley Bank? It has shaken the banking industry and the technology companies alike since no one had thought that such a huge mess could ever rise. Silicon Valley Bank is the 16th largest bank in America with $175 billion in customer deposits.
The Silicon Valley Bank or as it is known: The SVB. Much like its name suggests, SVB advertised itself as a “partner for the innovation economy.” It was the most popular bank for technology start-ups. Like all banks, SVB also took in customer deposits. In 2018, SVB had $50bn in deposits. By 2021, that number exploded 280% to $190bn.
What happened at Silicon Valley Bank?
If we take the key reasons, it is merely easy money flow for the bank. The bank was able to get all the funds from tech companies and looking to get easy interest from the market. To do this, SVB put customer deposits into long-dated bonds.
These bonds promised relatively high returns, especially in a 0% interest rate environment. SVB then used these returns to offer their customers better interest rates.
So, how things changed? Well, lets take a look here:
Beginning last year, The Fed started raising interest rates. The 3-month T-Bills from the US government now yield 5%. So, those long-dated bonds SVB holds earning a couple points of interest? You guessed it — they’re worth a whole lot less today.
At the same time, the economy is contracting. Moreover, the Tech start-ups are also short on cash.
So what do they do? Ask for their money back which forces SVB to sell those long-dated bonds at a huge loss.
Take-Over of Silicon Valley Bank
On March 8, 2023, SVB revealed they had lost $2 billion while selling bonds. This resulted in chaos. Resultantly, the market cap of SVB dropped by 60% in a single day on March 9. On 10th March 2023, the regulators shut down the bank.
Resultantly, $175 billion in customer deposits are now at risk. And just 2.7% of those deposits are insured. So what happens next? No one knows for sure. This is about $171 billion of customer’s money at risk.
Yet, two things are clear:
- The FDIC has stepped in. Their job is to liquidate the bank’s assets to pay back its customers.
- Startups who banked with SVB are panicking.
Without access to their cash, they’re struggling to make payroll. For example, Rippling is worth $11bn and handles payroll for thousands of companies. No one quite knows the extent to which other financial institutions may be at risk. Many hold low-yielding assets just like SVB did. Those assets are likely underwater thanks to rising interest rates.
Could SVB just be the first domino to fall?
Time will tell. However, thousands of start-ups, VC’s and CEOs are at risk of losing a bunch of money.
Most importantly, Silicon Valley bank shuts down by USA regulators after it lost 95% of its market cap and went bankrupt. Its shares were trading at $700 a few days back and it is reached to $40. Cumulatively, it is a loss of $110 billion to the shareholders.
And, the impact of SVB’s fall will be visible in the coming days.