Discover the fallout of the SVB-US Tech Bank collapse. Learn about the bank’s history, its role in Silicon Valley, reasons for failure, and the implications for startups and investors.
Silicon Valley Bank (SVB) was a commercial bank having its head-office at Santa Clara, California. SVB was the 16th largest bank in the United States at the time of its failure on March 10, 2023, and was the largest bank by deposits in Silicon Valley. It’s the US’s biggest bank failure since Washington Mutual during the height of the 2008 financial crisis. The Federal Deposit Insurance Corporation has seized the assets of SVB on March 10, 2023.
Silicon Valley Bank was founded by former Bank of America Managers namely Mr. Bill Biggerstaff and Mr. Robert Medearis. The bank was launched on October 17, 1983, as a wholly-owned subsidiary of SVB Financial Group with 100 initial investors. During the 1980s, the bank grew with the local high-tech economy, achieving 21 consecutive quarters of profitability. It went from a loss of $39,000 to a profit of $12.3 million in the year 1991. SVB acquired National InterCity Bank of Santa Clara in 1986. The bank continued to add branches in technology hubs across the country. During the 2007–2008 financial crises, SVB Financial Group received a $235 million investment from the federal government in exchange for preferred stock and warrants under the Troubled Asset Relief Program (TARP). In 2015, the bank stated that it served 65% of all U.S. startups. Its new offerings at the time included syndicated loans and foreign currency management, and it stood out as the only U.S. financial institution then working with virtual currency startups. SVB was the finance partner during the launch of Stripe’s Atlas platform in February 2016 to help startups register as U.S. corporations.
As of December 31, 2022, 56% of its loan portfolio were loans to venture capital firms and private equity firms, secured by their limited partner commitments and used to make investments in private companies, 14% of its loans were mortgages to high-net-worth individuals, and 24% of its loans were to technology and health care companies, including 9% of all loans which were to early and growth-stage startup companies. SVB was a banker to the Silicon Valley ventures capitalist and startups.
In 2022, SVB began to incur steep losses following increased interest rates and a major downturn in growth in the tech industry, where the bank’s liabilities were heavily concentrated. As of December 31, 2022, SVB had mark-to-market accounting unrealized losses in excess of $15 billion for securities held to maturity. In early March of 2023, a combination of factors—including poor risk management and a bank run driven by tech industry investors caused the bank to collapse.
SVB has $209 billion in assets and $175 billion in deposits which was equal to Indian private bank HDFC bank. Most of its deposits were from startups which SVB has received in the year 2020 and 2021 when interest rates were low and startups were getting easy funding. SVB invested these excess funds in bonds which typically mature in 10 years at 1.75% rate. Bond prices are inversely proportionally to interest rates. US Fed in the last 10 months dramatically raised interest rates from 0% to about 4.75% due to which the bond value of SVB bonds started to fall sharply and at the same time funding to startups fell sharply. So startups required funds and they started withdrawing their deposit from SVB. Due to short on cash, SVB started selling its bond portfolio at a loss. As per report SVB sold its $21 billion bond portfolio at about a $1.8 billion loss. At the same time SVB tried to raise $1.25 billion through the stock market but it failed. These two incidents made the SVB in trouble and more startups started withdrawing money. More than $42 billion in deposit were wired out over the next day and the social media kicked in the with the news going viral that there was a run on the bank. The stock of the bank collapsed 60% in one day wiping out $80 billion in value.
After a run on the bank, US regulatory authorities led by California Department of Financial Protection and Innovation shut down SVB and appointed the Federal Deposit Insurance Corporation (FDIC) as a receive. FDIC provides insurance of $250,000 on each bank deposit but SVB filings state that 97% of its deposit held capital more than that. Most of its impacted startups provide software-as-a-Service (SaaS) to US based clients or have foreign vendors for which they require a US bank account. SVB has used its short term money to buy long term US Treasuries in the anticipation that interest rates will remain low. It was a case of poor risk management leading to an asset liability mismatch in which the value of assets fell so low that it can’t cover its liability.
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