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Collapse of Silicon Valley Bank

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An entrance to a commercial park with the Silicon Valley Bank logo on a sign.
Silicon Valley Bank headquarters in Santa Clara, California

On March 10, 2023, Silicon Valley Bank (SVB) failed after a bank run, causing the largest bank failure since the 2008 financial crisis and the second-largest in U.S. history.[1] The collapse of SVB has had a significant impact on startups, with many unable to withdraw money from the bank. Other large technology companies, media, and wineries were also impacted.

During the COVID-19 pandemic, the tech sector experienced a period of growth. Capitalizing on an increase in deposits in 2021, SVB purchased long-term Treasury bonds. The current market value of these bonds decreased as interest rates rose during the 2021–2023 inflation surge. This chain of events was triggered after the Fed, US monetary authority, has raised the federal funds target rate by increasing the cost of credit throughout the economy with the ultimate goal of curbing inflation.[2] Higher interest rates also made private fundraising more costly and some Silicon Valley Bank clients started pulling money out to meet their liquidity needs. To raise cash to pay withdrawals by its depositors, SVB announced on March 8 that it had sold over US$21 billion worth of securities, borrowed US$15 billion, and would hold an emergency sale of some of its treasury stock to raise US$2.25 billion. The announcement, coupled with warnings from prominent Silicon Valley investors, caused a bank run as customers withdrew funds totaling US$42 billion by the following day.

On the morning of March 10, 2023, the California Department of Financial Protection and Innovation (DFPI) seized SVB and placed it under the receivership of the Federal Deposit Insurance Corporation (FDIC). The FDIC established a deposit insurance national bank, the Deposit Insurance National Bank of Santa Clara, to service insured deposits and announced that it would start paying dividends for uninsured deposits the following week; the dividends were funded by proceeds from the sale of SVB assets. Some 89 percent of the bank's US$172 billion in deposit liabilities exceeded the maximum insured by the FDIC.[3][4] Two days after the failure, the FDIC received exceptional authority from the Treasury and announced jointly with other agencies that all depositors would have full access to their funds the next morning.[5][6]

Background

Main article: Silicon Valley Bank

SVB was a commercial bank founded in 1983 and headquartered in Santa Clara, California. Until its collapse, SVB was the 16th largest bank in the United States and was heavily skewed toward serving companies and individuals from the technology industry.[7][8][9] Nearly half of U.S. venture capital-backed healthcare and technology companies were financed by SVB.[10] Companies such as Airbnb, Cisco, Fitbit, Pinterest, and Block, Inc. have been clients of the bank.[11] In addition to financing venture-backed companies, SVB was well known as a source of private banking, personal credit lines, and mortgages to tech entrepreneurs.[12] Silicon Valley Bank required an exclusive relationship of those borrowing from the bank.[13] Prior to March 9, 2023, SVB was in "sound financial condition," according to the California Department of Financial Protection and Innovation,[14] though an increased number of short sellers began to target SVB earlier in the year.[15][16] Employees received their annual bonuses on March 10, 2023, hours before the government took control of the company.[17]

As of the last call report of the bank, filed on December 31, 2022, it held $209 billion in total assets, with $175.5 billion in total deposits, of which the bank estimated $151.6 billion (86.4 percent) were uninsured.[18]

Collapse

See also: 2023 United States bank failures

Losses

The bank's deposits increased from $62 billion in March 2020 to $124 billion in March 2021, benefiting from the impact of the COVID-19 pandemic on science and technology. Most of these deposits were invested in long-term Treasury bonds as the bank sought a higher return on investment than were available on shorter-term bonds.[19] These long-term bonds fell in current market value as interest rates rose during the 2021–2023 inflation surge and they became less attractive as investments.[20] In April 2022, SVB's chief risk officer stepped down, and a successor was not named until January 2023—a period coinciding with the period of interest rate increases.[21][19] At the end of 2022, its marked-to-market unrealized losses for securities held to maturity exceeded $15 billion.[21][19]

At the same time, startup companies withdrew deposits from the bank to fund their operations as private financing became harder to come by. To raise needed cash to fund the withdrawals, the bank sold all of its available-for-sale securities, realizing a $1.8 billion loss.[22] The bank was criticized for timing its announcement shortly after Silvergate Bank, which catered to cryptocurrency users, started winding down its operations.[23]

Some banking experts said that the bank would have managed its risks better had it not been for the Economic Growth, Regulatory Relief and Consumer Protection Act, enacted in 2018 and supported by SVB CEO Greg Becker, which reduced the frequency and number of scenarios of required stress testing implemented under the Dodd–Frank Wall Street Reform and Consumer Protection Act for banks with under $250 billion in assets.[24]

Instability

In the week before the collapse, Moody's Investors Service reportedly informed SVB Financial, the bank's holding company, that it was facing a potential downgrade of its credit rating because of its unrealized losses.[19] On March 8, 2023, SVB announced it had sold over $21 billion worth of its investments, borrowed $15 billion, and would hold an emergency sale of its stock to raise $2.25 billion.[19] Despite the steps taken by the bank, Moody's downgraded SVB on March 8.[19][25] Investors at several venture capital firms, including Peter Thiel's Founders Fund,[26] urged their portfolio companies to withdraw their deposits from the bank.[27] By the close of business on March 9, customers had withdrawn $42 billion, leaving the bank with a negative cash balance of about $958 million.[28] Among the financial services companies receiving money from SVB customers were Brex, JPMorgan Chase, Morgan Stanley and First Republic Bank.[29] Venture capital funds including Founders Fund, Union Square Ventures and Coatue Management had encouraged companies in their portfolios to avoid impact from SVB's collapse by withdrawing their money,[30] and Founders Fund withdrew all of its funds from the bank by the morning of March 9.[31] The value of SVB's shares plummeted until a trading halt was implemented on the morning of March 10.[32][33][34][35][36]

On February 27, SVB Financial Group CEO Greg Becker sold 12,451 shares of company stock, worth $3.6 million, through an executive trading plan that he filed with the SEC under Rule 10b5-1 on January 26. The rule has been criticized as a loophole allowing for insider trading. Beginning April 1, the SEC will require a minimum 90-day cooling period for most executive trading plans.[37]

The logo of the Deposit Insurance National Bank of Santa Clara. Two horizontal lines are on the top and bottom of the logo. The letters 'DINB' are large, and 'of Santa Clara' are below it in a smaller font.
The FDIC created the Deposit Insurance National Bank of Santa Clara (DINB) to distribute insured deposits.

Receivership

On the morning of March 10, examiners from the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) arrived at the offices of SVB to assess the company's finances.[38] Several hours later, the California Department of Financial Protection and Innovation (DFPI) issued an order taking possession of SVB,[28] citing inadequate liquidity and insolvency,[8] and appointed the FDIC as receiver.[39][40] The FDIC then established the Deposit Insurance National Bank of Santa Clara to re-open the bank's branches the following Monday and enable access to insured deposits,[4][41][42][43][44] and it opened an auction over the weekend to find a buyer for the failed bank.[45] The failure of SVB was the largest of any bank since the financial crisis of 2007–2008 and the second-largest in U.S. history.[46] The Federal Reserve Bank of San Francisco stated that the bank's CEO Greg Becker was no longer on its board of directors.[47]

According to regulatory reports as of December 31, 2022, uninsured deposits were estimated to represent 89 percent of total deposits at the bank;[3] however, Moody's Investor Service reported on March 10 that it expected a recovery rate for uninsured depositors of 80–90 percent.[48] The FDIC said it would begin covering uninsured deposits with special dividends within days as SVB's assets were liquidated.[49] The FDIC notified Silicon Valley Bank employees that they would be let go in 45 days' time; in the meantime, it offered salaried employees a 50% raise and hourly employees double pay for any overtime.[50] Treasury Secretary Janet Yellen has ruled out bailing out SVB.[51]

In an announcement on March 12, the Treasury, Federal Reserve, and FDIC stated that all depositors would be made whole without expenditure of taxpayer money.[6][52][5]

The Bank of England issued a statement that it sought a court order to place the United Kingdom subsidiary of the bank into a Bank Insolvency Procedure.[53][54] Shanghai Pudong Development Bank issued a statement that its joint operations with SVB, chaired by its own Shanghai-based chairman, were not affected by the collapse as of March 11.[55][56] On March 13, 2023, it was announced that HSBC UK had agreed to acquire Silicon Valley Bank UK for £1 in a rescue deal, at no cost to the taxpayer and with depositors fully protected.[57][58]

Impact

Experts said that SVB's collapse was unlikely to pose a systemic risk to the U.S. financial system.[59] However, although experts think these effects are temporary, the bank's collapse created hardships among some tech startups, and companies holding significant uninsured deposits and low cash flow faced significant risks.[60][23][61][62]

Customers

Many startups were unable to retrieve money, resulting in companies taking out loans to make payroll.[61][63] Because California state law requires employees to be paid within a certain number of days,[64] continued inability to access deposits may cause a large number of startups to furlough workers, reduce their workforce through layoffs, or shut down entirely.[65] The bank's collapse also reduces available funding for startups on the venture debt market, which has grown in importance as venture capital firms have dramatically scaled back their investments.[66] E-commerce company Etsy was forced to delay seller payouts; the company used SVB to send out deposits to some sellers.[67] The bank's collapse coincided with the beginning of the annual, startup-oriented South by Southwest Interactive conference in Austin, Texas. Aside from some disruption caused by SVB credit cards, attendees maintained an air of calm during the event.[68]

In a Securities and Exchange Commission (SEC) filing, streaming media company Roku, Inc. revealed that around a quarter of the company's cash reserves—$487 million—were held by SVB.[69] Other companies affected by the collapse include video game developer Roblox Corporation, video hosting service Vimeo,[70] and payroll processor Rippling.[71][72] Circle, the issuer of USD Coin (USDC), attested that SVB is one of the six banking partners used by the company to manage its cash reserves for USDC.[73] USDC's price fell below its US$1 pegged exchange rate during trading on March 10 and 11, causing Coinbase to halt conversions between USDC and U.S. dollars.[23] USDC had recovered most of the losses after Circle assured investors that the peg would remain honored.[74] More than 1,500 climate change–related technology startups had taken out loans or had lines of credit with Silicon Valley Bank. The failure came at a sensitive time when many such startups were scaling up to meet expected demand from the Inflation Reduction Act of 2022.[75]

Outside the technology startup space, Vox Media had its cash concentrated at the bank and saw its SVB-issued credit cards stop working.[61] The California wine industry was also affected by SVB's collapse, since it was a leading regional winery banker.[76] Some Oregon wineries were also affected.[77] Businessman Mark Cuban reportedly had millions in the bank, along with his side venture Cost Plus Drugs.[78][better source needed] Since 2002, the bank had made more than $2 billion in loans and investments, including $1.6 billion in loans since 2014, to build affordable housing in Silicon Valley and San Francisco, as well as Massachusetts (from its 2021 acquisition of Boston Private). Housing advocates predicted delays and difficulty assembling funding.[79]

Financial system

Market capitalization of U.S. banks lost a combined $100 billion in two days and European banks lost $50 billion.[3] SVB's losses highlighted the challenge that banks could face as interest rate increases reduced the market value of bonds that they purchased under low-rate policies.[80] Some companies have sought safety with larger commercial banks, transferring their deposits out from regional banks similar to Silicon Valley Bank, raising concerns about further instability in the banking sector.[64] Several banks, such as First Republic Bank and Western Alliance Bancorporation, issued press releases seeking to calm investors.[81][82]

Despite these concerns, banking experts believe that other banks will remain stable as SVB was overly specialized in providing banking to a risky sector of the economy, and financial regulations have strengthened since the 2008 financial crisis, which preceded the Great Recession.[10][83] SVB had, in 2021, reached the threshold under the Dodd-Frank Act requiring it to submit a resolution plan ("living will") to the FDIC, which it did the following year. It had not participated in periodic stress testing under the act, as the threshold for that requirement had been raised in 2018; SVB's chief executive was among those requesting the change.[84][85]

On March 12, 2023, Signature Bank was also closed, being taken into possession by the New York State Department of Financial Services.[86][87] Following the bank failures, the Federal Reserve announced the creation of a Bank Term Funding Program to shore up liquidity for other at-risk banks.[88][89]

Reactions

U.S. President Joe Biden discussed the collapse with California Governor Gavin Newsom on March 11.[90] White House economic advisor Cecilia Rouse expressed confidence in the resilience of the banking system.[64] Treasury Secretary Janet Yellen has ruled out bailing out Silicon Valley Bank's investors and creditors.[91] Israeli Prime Minister Benjamin Netanyahu pledged to take steps to help Israeli technology companies get through the liquidity crisis.[92]

Venture capitalists Garry Tan and David O. Sacks, hedge fund manager Bill Ackman,[64] and California State Senator Scott Wiener called for a government intervention to protect uninsured depositors.[93] Representatives Ruben Gallego of Arizona and Eric Swalwell of California called for depositors to be made whole,[64] while Representatives Ro Khanna[90] and Brad Sherman of California called on the Treasury Department and FDIC to affirm that depositors would be protected so they could make payroll.[64] Representative Matt Gaetz of Florida and Republican presidential candidates Nikki Haley and Vivek Ramaswamy expressed opposition to any taxpayer-funded bailout of the bank. Ramaswamy suggested that the FDIC's deposit insurance limit be raised instead.[64][94]

Newsom and Representative Anna Eshoo of California applauded the FDIC's announcement that it would protect depositors without impacting taxpayers via the Bank Term Funding Program.[95][96] Mayor Matt Mahan of San Jose criticized the federal government's response to the bank's failure as slow and indicative of its misunderstanding of Silicon Valley startups' impact to the national economy.[91][95] Khanna and Mahan called for earnings from CEO Greg Becker's recent sale of SVB shares to be clawed back and returned to depositors.[95]

Cryptocurrency proponents cited the collapse in support of a decentralized monetary system. Others in the tech sector proposed that recent events in the cryptocurrency business, such as the bankruptcy of FTX and the exit of cryptocurrency-focused banks, had conditioned depositors to panic, and noted that the FDIC's limited guarantee had no parallel in cryptocurrency.[23]

See also

References

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