Silicon Valley Bank, located in Santa Clara, California, was closed by the California Department of Financial Protection and Innovation in March 2023, due to a significant decline in the value of its investments and large-scale withdrawals by depositors. Bank failures are not uncommon, with over 550 banks having been shut down between 2001 and 2023. However, the closure of Silicon Valley Bank was particularly noteworthy, occurring during a time when many people in the U.S. were already worried about a potential recession. Furthermore, it was the largest bank failure since the financial crisis of 2008, when Washington Mutual closed its doors.
To better understand the reasons behind the collapse of Silicon Valley Bank, we will delve into its history, the events leading up to its failure, and the implications for depositors, investors, and the broader economy.
Silicon Valley Bank (SVB), a subsidiary of SVB Financial Group, was the 16th largest bank in the United States, with assets totaling approximately $209 billion as of December 2022. The bank offered business banking services to companies at all stages, but was especially recognized for its support of startups and venture-backed firms. According to the company’s website, 44% of the technology and healthcare initial public offerings (IPOs) backed by venture capital firms in 2022 were clients of Silicon Valley Bank.
The idea for Silicon Valley Bank was born during a poker game between Bill Biggerstaff and Robert Medearis. In 1983, the two, together with the bank’s CEO Robert Smith, opened the first branch in San Jose, California. The bank went public in 1988 and relocated to Menlo Park in 1989 to strengthen its position in the venture capital industry.
Why Did Silicon Valley Bank Fail?
Silicon Valley Bank experienced significant growth between 2019 and 2022, leading to a substantial amount of deposits and assets. However, most of the excess was invested in Treasury bonds and other long-term debts, which became riskier investments as the Federal Reserve increased interest rates in response to high inflation. This caused the bank’s bonds to decline in value, compounded by significant withdrawals from accounts of some of the bank’s technology-industry customers who were facing financial difficulties.
To accommodate the withdrawals, the bank sold some investments, incurring losses of $1.8 billion, which marked the beginning of the end for the bank. Some experts attribute the bank’s failure to the rollback of the Dodd-Frank Act, a major banking regulation enacted in response to the 2008 financial crisis. The Act subjected banks with assets exceeding $50 billion to additional oversight and rules, but the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 raised the threshold to $250 billion, thereby exempting Silicon Valley Bank from such regulations. Had the threshold remained at $50 billion, Silicon Valley Bank would have been subject to closer scrutiny by regulators.
Impact on Depositors and Investors
Silicon Valley Bank experienced substantial growth between 2019 and 2022, resulting in a significant amount of deposits and assets. However, as the Federal Reserve increased interest rates in response to high inflation, the bank’s bonds became riskier investments, causing a decline in their value. Additionally, some of the bank’s customers in the technology industry encountered financial difficulties, resulting in the withdrawal of funds from their accounts. In response, Silicon Valley Bank sold some of its investments at a loss, which resulted in a loss of $1.8 billion.
The failure of Silicon Valley Bank has had a significant impact on its depositors and investors. While the FDIC insures bank deposits of up to $250,000 per depositor per bank for each account category, most of the accounts in Silicon Valley Bank held more than $250,000 in deposits, meaning that most of the funds were uninsured. To prevent contagion, the Federal Reserve announced on March 12 that it would invoke a systemic risk exception, meaning that all depositors would be made whole, even for those funds that were uninsured.
However, investors are not as fortunate as depositors. While the FDIC can protect depositors from losses, it cannot do the same for shareholders and unsecured debt holders. This means that individuals and institutions that owned stock in SVB Financial Group may not get their money back.
The decision to fully insure and protect all of Silicon Valley Bank’s depositors and their balances was made by federal regulators to prevent contagion, which could impact not only banks but the economy as a whole. The FDIC will cover the losses incurred by the bank’s collapse, using money from quarterly premiums that all insured banks pay to the agency.
Although the losses will not be borne directly by taxpayers, they may ultimately be affected by the costs. For example, if a bank has to pay more for deposit insurance, it may charge higher interest rates on loans or pay lower interest rates on savings accounts.
The Bank Term Funding Program (BTFP) is a program authorized by the Federal Reserve in response to the collapse of Silicon Valley Bank. The program offers loans to banks, credit unions, and other deposit institutions for a duration of up to one year to help them meet their depositors’ needs and avoid having to sell securities quickly. It was implemented on March 12, 2023, and is expected to remain in effect until at least March 11, 2024.
The collapse of Silicon Valley Bank in March 2023 represents the most significant bank failure since the 2008 financial crisis, further exacerbating already-existing concerns of an impending recession, and undermining consumer confidence in the economy.
The collapse served as a stark reminder of the fragility of the banking system, highlighting several vulnerabilities, such as the absence of sufficient oversight for banks with less than $250 billion in assets.
Fortunately, federal regulators responded swiftly to the failure of SVB by implementing several measures to minimize depositors’ losses and restore confidence in the banking system and the economy at large.