How Silicon Valley Bank failed
Silicon Valley Bank is no more. It’s the first bank backed by the Federal Deposit Insurance Corp. to fail since 2020. The FDIC has taken it over and is sorting through the mess.
The swift collapse of the Santa Clara, California-based lender has some investors around the world scared into thinking that other banks may be heading toward similar disasters. For now, that seems unlikely, considering that SVB is not a typical bank because a lot of its depositors are startups and tech investors.
“It’s just where all our money sits, revenue, investment, how I pay all the employees,” said Nadine ElAshkar, CEO of Lilo. “We’re a marketplace for hotels to do all their procurement in one place.”
Linens, uniforms, food, drink, all that stuff. ElAshkar is part of a group chat with other startup CEOs, and Thursday, it blew up. Her CEO friends were getting warnings from their investors to take their money out.
She tried, but the site was down. So she sent a board member to move the money in person.
“The security were not letting anyone in. Then the police came and said, ‘This is private property’ and basically kicked everyone out,” ElAshkar said.
Her company, along with many others, cannot get to its money.
“I’m beating myself now, but how could I have known that such an established bank would crumble in literally 24 hours?” she said.
Here is how Silicon Valley Bank met its downfall. First, its clients — all those startups and venture capitalists — weren’t raising as much money this past year, and their bank accounts were getting smaller.
But “there’s a double whammy,” according to Erik Gordon, professor at the University of Michigan’s Ross School of Business.
“At the same time that the companies are withdrawing money from Silicon Valley Bank, its other big asset — which was very safe government bonds — have gone down in value,” he said.
The bonds lost value because the Federal Reserve has been raising interest rates. As interest rates go up, bond values go down. As more of SVB’s clients took their money out, it had to sell bonds at a loss, and it wasn’t enough to keep the bank afloat.
Numerous banks, though, own bonds that have lost value.
“At year-end last year, there were something like $620 billion in accumulated losses in the securities portfolios of the banking industry,” said Konrad Alt, a co-founder of Klaros Group.
Alt calculated that’s equivalent to about 28% of the capital in the banking industry as a whole.
“That’s obviously not good news for any bank, but it’s not necessarily a crisis,” Alt explained. “The crisis occurs if you have to sell and take losses.”
Since the financial crisis of 2008, banks are much better capitalized and most don’t have niche, undiversified client bases like SVB did. So the risk of contagion is low. But, Alt said, there are probably some other banks out there that could run into trouble.