It came fast and it may not be over yet.
Silicon Valley Bank (SVB) collapsed over the past week after experiencing a bank run, which occurs when a large number of customers withdraw their deposits almost simultaneously over concerns of the bank’s solvency.
The stock closed the March 8 trading session at $267.83 per share and within the next two trading sessions plummeted to $106.04.
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So, what is SVB and how did it fall apart? Here’s a brief explainer.
SVB was founded in 1983 and, as its name implies, was known for helping facilitate the explosive growth of the California startup and technology scene in the 1990s. As of Dec. 31, 2022, 56% of its loan portfolio were loans to venture capital firms and private equity firms. Its collapse began with moves the bank made in during the COVID-19 pandemic.
“Flush with cash from start-ups, Silicon Valley Bank did what most of its rivals do: It kept a small chunk of its deposits in cash, and it used the rest to buy long-term debt like Treasury bonds,” according to the New York Times. “Those investments promised steady, modest returns when interest rates remained low.”
But the “overheated” economy and the Federal Reserve’s subsequent interest rate hikes caused SVB’s investments to turn red.
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“When interest rates rise, newly issued bonds start paying higher rates to investors, which makes the older bonds with lower rates less attractive and less valuable,” according to CNN. “The result is that US banks now have a large amount of unrealized losses on their books and may lack liquidity.”
The Times reports SVB’s collapse was unique in other ways:
“The Federal Deposit Insurance Corporation only insures amounts up to $250,000, so anything more than that would not have the same government protection. Silicon Valley Bank had a significant number of big and uninsured depositors. Once Silicon Valley revealed its huge loss on [March 8], the tech industry panicked, and start-ups rushed to pull out their money.”
By Sunday evening, Signature Bank also went under, and the stock prices of several regional banks plummeted in Monday’s trading session.
The broader market was holding up well in early trading Monday, however, as the U.S. Treasury Department and other regulators stepped in over the weekend to declare that all depositors of both Signature and Silicon Valley Bank will be made whole, and “no losses will be borne by the taxpayer.
The Federal Deposit Insurance Corporation (FDIC) transferred all deposits—both insured and uninsured—and substantially all assets of the former Silicon Valley Bank of Santa Clara, California, to a newly created, full-service FDIC-operated “bridge bank” in an action designed to protect all depositors of Silicon Valley Bank. Depositors will have full access to their money.
Analysts say the collapse of SVB is unlikely to cramp the U.S. economy, but it could raise the odds of a recession.
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