How Silicon Valley Bank collapsed, who it affects, and what happens now

what is svb

The Federal Reserve Board, the governing body of the Fed, announced it would launch a review of the «supervision and regulation of Silicon Valley Bank, in light of its failure.» Tech entrepreneur Mark Cuban, known to many for his role as a panelist on the show «Shark Tank,» derided the $250,000 bank insurance threshold as «too low.» March 9 – Shares of Silicon Valley Bank fell 60% in response to investor concern about the bank’s distressed financial position.

what is svb

But that announcement spooked the bank’s clients, who got worried about SVB’s viability, and then proceeded to withdraw even more money from the bank — a textbook definition of a bank run. Regulators announced the takeover after what was effectively a run on the bank. Depositors rushed to withdraw their money amid fears SVB wouldn’t be able to meet redemption requests.

That funding, the announcement said, will come from loans from the newly created Bank Term Funding Program. While the FDIC has guaranteed deposits of up to $250,000, depending on the size of the company, that money wouldn’t go very far. This doesn’t just apply to companies that deposited cash with SVB — it’s also a question for companies using other SVB instruments, like revolver loans or credit cards.

What Happens to Your Money If the Bank Collapses?

The money being used doesn’t come from taxes, instead, it’s from insurance premiums paid by banks, and interest earned on money invested in US government obligations, according to the FDIC. The FDIC’s job is to get the maximum amount from Silicon Valley Bank’s assets. One is that another bank acquires SVB, getting the deposits in the process.

what is svb

What happened is a little complicated — and I’ll explain farther down — but it’s also simple. A bank run occurs when depositors try to pull out all their money at once, like in It’s a Wonderful Life. And as It’s a Wonderful Life explains, sometimes the actual cash isn’t immediately there because the bank used it for other things.

Operations in lead-up to collapse

SVB Financial was in talks to sell itself after attempts of raising capital failed, CNBC reported, though plans to find a buyer were abandoned. First Republic Bank dropped 65% before trading was halted; Charles Schwab, the eighth-largest U.S. bank, dropped 11%. March 13 – In a morning address from the White House, President Biden sought to tamp down concern about the potential spread of the crisis across the financial system. Below is a timeline of the Silicon Valley Bank collapse, the spread of concern across the financial system and the effort to contain the economic fallout.

That was the immediate cause of death for the most systemically and symbolically important bank in the tech industry, but to get to that point, a lot of other things had to happen first. Under the program, the Federal Reserve will allow distressed banks to borrow funds on favorable terms directly from the Fed instead of generating cash by selling underwater securities, as Silicon Valley Bank had done. Those funds will equip banks to pay depositors who may want to quickly pull out funds amid the turmoil. «I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely that this kind of bank failure will happen again and to protect American jobs and small businesses.» Billionaire tech mogul Peter Thiel is seen as having accelerated SVB’s fall after talk circulated Thursday that his Founders Fund venture capital firm asked its companies to move their funds. Nearly all banks are protected by FDIC insurance, which covers up to $250,000 per depositor per account ownership category.

  1. By Friday morning, trading of the stock was halted, and there was reporting SVB was in talks to sell.
  2. Amid concerns about the bank’s stability, some venture capital funds, including Peter Thiel’s Founders Fund, advised portfolio companies to pull money out of SVB.
  3. Other banks took a hit amid SVB’s failure as investors and analysts scope out other problems similar to those SVB faced, including First Republic Bank, whose shares fell as much as 52% during early trading and have since plummeted even more.
  4. As this was happening, some of Silicon Valley Bank’s customers—many of whom are in the technology industry—hit financial troubles, and many began to withdraw funds from their accounts.

Some people believe that Silicon Valley Bank’s failure started far earlier with the rollback of the Dodd-Frank Act, which was the major banking regulation that was put into effect in response to the financial crisis of 2008. As this was happening, some of Silicon Valley Bank’s customers—many of whom are in the technology industry—hit financial troubles, and many began to withdraw funds from their accounts. President Joe Biden commented on the situation in an attempt to reassure the public, saying the Silicon Valley Bank funds would still “be there when you need them” without requiring a taxpayer-funded bailout.

Biden blames Trump for SVB failure

A customer stands outside of the shuttered Silicon Valley Bank headquarters in Santa Clara, Calif., on March 10, 2023. The lender was taken over federal regulators on Friday, marking one of the largest bank failures since the 2008 Global Financial Crisis. Silicon Valley Bank met its demise largely as the result of a good old-fashioned bank run after signs of trouble began to emerge in the second week of March. The bank takes deposits from clients and invests them in generally safe securities, like bonds.

Of course, one other problem is that a lot of investors were also banking at SVB, too. Just two days after SVB failed, New York-based Signature Bank was shut down by regulators, becoming the third-largest bank failure in U.S. history (right behind SVB). Amid concerns about the bank’s stability, some venture capital funds, including Peter Thiel’s Founders Fund, advised portfolio companies to pull money out of SVB.

Earlier this week, Silvergate, a California-based bank that caters to the cryptocurrency industry, announced plans to unwind its operations. People walk through the parking lot at the Silicon Valley Bank headquarters in Santa Clara, Calif., on March 10, 2023. It was a collapse that sent shockwaves across the banking industry, hammering shares of other smaller and regional lenders. Brad Hargreaves, a startup founder who previously served on boards of companies that did business with SVB, said the bank was unusual in that often played a dual role as corporate and personal lender to CEOs. Silicon Valley Bank, one of the leading lenders to the tech sector, was shut down by regulators Friday over concerns about its solvency. This meant that Silicon Valley Bank was left in the lurch when the Federal Reserve, looking to combat rapid inflation, started raising interest rates.

For a mid-sized regional bank, «buying the whole bank would be a very large transaction and a big shift in focus to one area although Silicon Valley is known for very strong relationships in this business,» wrote Vivek Juneja, JPMorgan analyst. Early reports suggested PNC Financial, JPMorgan and Royal Bank of Canada were among the suitors for the failed SVB bank, but more recent reports have said PNC has declined and interest from RBC has cooled. That fear directly flowed to Signature Bank, contributing to its collapse on Sunday. This set off panic across Silicon Valley, prompting SVB’s CEO on Thursday to hold a conference call with clients asking them to remain calm.

But it would be too simplistic to say none of the losses will be borne by taxpayers. As a part of Dodd-Frank, banks with more than $50 billion in assets would be subject to additional oversight and rules. But the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, signed into law by President Donald Trump, significantly changed that requirement. Instead of setting the threshold at $50 billion, the 2018 law increased it to $250 billion. To accommodate these large withdrawals, Silicon Valley Bank decided to sell some of its investments, but those sales came at a loss.

Customers tried to withdraw $42 billion in deposits on March 9th alone — a quarter of the bank’s total deposits on a single day. That might be a lot of money for an individual, but we’re talking about companies here. A recent regulatory filing reveals that about 90 percent of deposits were uninsured as of December 2022.

Banking regulators shut down Silicon Valley Bank, or SVB, on Friday, March 10, after the bank suffered a sudden, swift collapse, marking the second-largest bank failure in US history. Just two days prior, SVB signaled that it was facing a cash crunch. It first tried to raise money by selling shares and then it tried to sell itself, but the whole thing spooked investors, and ultimately, it went under. On Sunday, March 12, the federal government said it would step in to make sure all of the bank’s depositors would have access to their funds by Monday, March 13. Regulators also shuttered another bank, Signature Bank of New York, which had gotten into crypto, and the federal government said its depositors’ money would be guaranteed as well. Silicon Valley Bank was founded in 1983 in Santa Clara, California, and quickly became the bank for the burgeoning tech sector there and the people who financed it (as was its intention).

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