Silicon Valley Bank collapsed this week after a bank run which had depositors trying to withdraw $42 billion in just one day. It’s been dominating headlines, even outside of tech as there will likely be ramifications for the banking industry.
So how did we get here?
A bank run is when majority of depositors start to withdraw their funds generally due to fears the bank may become insolvent, leading to the bank not having enough money to pay back all its depositors at once as assets are generally distributed as loans.
Thanks to low interest rates and a crazy market, startups have been raising a lot of money in the last few years - a large part of that was deposited with SVB
SVB management makes the decision to invest most of this money into longer-term securities to chase after higher yields
As interest rates started to rise, less money was flowing through startups/VCs and those longer-term securities started to look less attractive that were locked into low interest rates
In order to rectify the situation SVB decides to liquidate most of the “available for sale” portfolio and reinvest into shorter-term assets, leading to a $1.8 billion loss which SVB tries to balance by raising funds
Old articles, viral twitter threads, newsletters and VCs start to spread the word and depositors start to withdraw money after panic ensues
The bank run is complete and SVB collapses and is taken over by the FDIC
What happens now?
As they say, all is well that ends well. The biggest fear and panic was business who had more than $250,000 which would mean it would not be insured by the FDIC guarantee. The biggest concern was for businesses not being able to meet payroll and pay their bills.
HSBC buys the UK arm of SVB for £1
FDIC releases a statement, assuring all money will be made available to depositors and no losses will be borne by taxpayers
Companies like Remote (link) and Deel (article) made their own funds available to ensure payroll was met for their customers affected by SVB
I’m not a banking or finance expert but whilst it’s great to see the FDIC come in and protect depositors money this will likely have greater reverberations. In effect this sets a precedent that the $250,000 limit is immaterial and all funds will be insured.
Banks currently pay a premium to the FDIC for this insurance, and if the limit of protection is increasing it would surprising if the fees associated did not also begin to increase. Some banks may now take greater risks knowing if they make mistakes like SVBs, their depositors money will likely also be safe. The natural response would be greater regulation, tightening of credit and fees for consumers
There’s some excellent and more detailed analysis out there, some of my picks worth reading:
The End of Silicon Valley (Bank) by Ben Thompson (Stratechery)
SVB’s failure exposed serious flaws in the tech ecosystem by Maelle Gavet (CEO Techstars)
Regulators face questions over missed warning signs at Silicon Valley Bank by FT
First Republic Bank shares plunge, prompting trading halt as startups process SVB crash by Techcrunch
KPMG US auditors signed off on Silicon Valley Bank, Signature Bank by AFR
The tech industry moved fast and broke its most prestigious bank, by The Verge
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