A bank run dealt a lethal blow to Silicon Valley Bank Friday, forcing its failure after the US Federal Reserve raised interest rates, scaring away potential investors from the financial institution best known for its relationships with high-flying world technology startups and venture capital.
Its downfall is the largest failure of a US-based financial institution since Washington Mutual collapsed at the height of the financial crisis in 2008.
Here’s what to know about why the bank failed, who was affected most, and how it may or may not affect the wider banking system in the US and worldwide.
US Federal Reserve increased interest rates
Silicon Valley Bank was hit hard by the downturn in technology stocks over the past year as well as the Federal Reserve’s aggressive plan to increase interest rates to combat inflation.
The bank bought billions of dollars worth of bonds over the past couple of years, using customers’ deposits as a typical bank would normally operate.
These investments are typically safe, but the value of those investments fell because they paid lower interest rates than what a comparable bond would pay if issued in today’s higher interest rate environment.
Usually, that’s not an issue because banks hold onto those for a long time — unless they have to sell them in an emergency.
Silicon Valley’s investors became increasingly cash-strapped
But Silicon Valley’s customers were largely startups and other tech-centric companies that started becoming needier for cash over the past year.
Venture capital funding was drying up; companies were not able to get additional rounds of funding for unprofitable businesses and therefore had to tap their existing funds — often deposited with Silicon Valley Bank, which sat in the centre of the tech startup universe.
So, Silicon Valley customers started withdrawing their deposits.
At first, that wasn’t a huge issue, but the withdrawals started requiring the bank to start selling its own assets to meet customer withdrawal requests.
Silicon Valley Bank sold its bond portfolio at a loss
Because Silicon Valley customers were largely businesses and the wealthy, they likely were more fearful of a bank failure since their deposits were over $250,000 (€234,575) or the US government-imposed limit on deposit insurance.
That required selling typically safe bonds at a loss and those losses added up to the point that Silicon Valley Bank became effectively insolvent.
The bank tried to raise additional capital through outside investors but was unable to find them.
A bank run sank the ship
The fancy tech-focused bank was brought down by the oldest issue in banking and one of the few means that can surely tank a bank: a run on it.
Bank regulators had no other choice but to seize Silicon Valley Bank’s assets to protect the assets and deposits still remaining at the bank.
What happens now?
At the moment, experts don’t expect there to be any issues spreading to the broader banking sector.
There might be some pockets of instability caused by this, as seen in the dip the crypto market took on Saturday morning CET, but it already showed signs of recovery later in the day.
Silicon Valley Bank was large but had a unique existence by servicing nearly exclusively the technology world and VC-backed companies. It did a lot of work with the particular part of the economy that was hit hard in the past year.
Other banks are far more diversified across multiple industries, customer bases and geographies.
However, there might be economic ripple effects, especially in the US tech start-up world, if the money currently remaining at Silicon Valley Bank can’t be released quickly.