Silicon Valley Bank (SVB), based in Santa Clara, California, was the U.S.'s 16th largest bank until it failed after a run on its deposits in March of 2023, causing it to be seized by California's Department of Financial Protection and Innovation (DFPI), which operates under California Business, Consumer Services, and Housing Agency. The DFPI placed the bank into the receivership of the FDIC. It worked in offices in 13 countries and employed almost 9,000 people full-time. The bank was a subsidiary of SVB Financial Group, and then the bank's assets were transferred to Silicon Valley Bridge Bank, N.A., after its failure. It was also the largest bank by deposits in Silicon Valley, a region known for being rich in technology companies. The bank's customers included tech startups, venture capital firms, and wealthy technology players. It was the second-largest bank failure in U.S. history, following Washington Mutual's collapse in 2008. At the time of failure, it has $209 billion in assets.
Catering to tech companies became an enviable niche for SVB. And when tech firms were thriving, it was good for the bank. But as the tech sector has taken a downward turn, those companies started pulling their deposits out of the bank, leaving SVB to make good on that money and forcing it to sell its bond holdings. SVB invested its funds in long-term treasury bonds when rates were near zero in 2021. So, when interest rates increased, the prices of long-term bonds fell, tanking their investments. As a result, the bank lost $1.8 billion after taxes and needed more capital to fulfill their customers' obligations, then lost more than $160 billion in value in 24 hours. The U.S. government stepped in to guarantee the deposits because the bank posed a major risk to the economy.
SVB was known for giving loans to startup companies at relatively low rates. However, the terms of those loans required borrowers to keep deposits with the bank, and now there is a mad dash to pull cash out of those accounts. This could be seen as a breach of the original loan terms, making things more complicated for a possible buyer.
The Federal Reserve has said that all depositors at SVB would be fully protected and be able to access all of their money through the newly-created and FDIC-administered successor, Silicon Valley Bridge Bank, N.A. Before the FDIC intervened, depositors could only access up to $250,000. But many companies had much more than that in the bank.
And what about the debt that companies had borrowed from the bank?
Currently, those funds are unavailable for borrowers that have not drawn down the loans. Those with revolving lines of credit may be the most impacted when paying customers or covering inventory. Borrowers could also risk violating loan covenants if they withdraw deposits from their SVB accounts. And it is still being determined whether a possible buyer of the bank's loan book would honor the original terms loans. The good news is that the SVB loan portfolio will likely be purchased at some point. However, some industry players think that the bank's assets could be sold off piecemeal.
Because SVB's situation was unique regarding bond exposure and sector specificity, other banks are not at the same level of risk as SVB. But it's no surprise that there is a concern across the business world. Some banks see stock values drop, and there could be other ripple effects from the SVB collapse because, naturally, people get nervous about their money. Yet, analysts report that the broader banking sector remains healthy, and even the President has reinforced that the banking system is safe.
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