How Silicon Valley Bank collapsed in less than 48 hours

Mar 21, 2023

Simone Del Rosario Business Correspondent

By Simone Del Rosario (Business Correspondent), Emma Stoltzfus (Editor), Brent Jabbour (Producer)

It took less than 48 hours for Silicon Valley Bank to fall from the preferred startup and venture capital bank with $200 billion in assets to being irreparable. Since its collapse and federal takeover, fears have spread throughout the global banking sector, leading to closures of other banks.

The California bank was a bit of a special breed. It called itself “the financial partner of the innovation economy” and claimed to bank nearly half of all venture-capital-backed startups in the U.S. In other words, it had a pretty homogenous client base.

Commercial banks usually make money by taking in customer deposits and then using that money to dish out loans to other customers, earning money on the charged interest. But for the past couple of years, many of SVB’s customers didn’t really need loans. The startup world was flush with venture-capital cash because with low interest rates, money was cheap. By the end of 2022, SVB said it had $212 billion in assets.

In lieu of providing more loans, SVB used a lot of its assets to buy up large amounts of interest-bearing government bonds and planned to hold those bonds until they matured. Here’s where the bank’s problem started.

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With inflation at 4-decade highs, the Federal Reserve started rapidly hiking interest rates starting in March 2022. Money started draining out of the startup world and SVB’s customers needed to take out their money to pay bills and make payroll. But SVB had a lot of it tied up in these bonds. And because interest rates had gone up, their lower-interest-yielding bonds were worth less on the open market.

On Wednesday evening, Mar. 8, SVB announced in a press release it was trying to raise money by selling more shares. It also said it sold $21 billion worth of bonds at a $1.8 billion loss. The bank was trying to shore up its balance sheet and add liquidity but that caused its customers to panic. Big-time VC firms started telling startups to pull their money and it triggered a bank run.

On Thursday alone, Mar. 9, customers attempted to pull out $42 billion, 20% of the bank’s total assets. That’s way more cash than any bank is required to have on hand and SVB certainly didn’t have it liquid.

“We wired out the money yesterday, but Silicon Valley Bank did not honor our wire,” Shelf Engine CEO and SVB customer Stefan Kalb said Mar. 10. “So we were not able to move any of our cash out of our bank account. Unless someone comes in and is able to support Silicon Valley Bank through an acquisition, through other means, a lot of us are going to be in a very painful situation very quickly. And so the big ask is for the federal government to come in and step in.”

By Friday, Mar. 10, federal regulators took over the bank and shut it down. Two days later, on Sunday, Mar. 12, New York-based Signature Bank became the next casualty as customers there worried their deposits would also be unsafe.

Tags: Banking, Federal Reserve, Signature Bank, Silicon Valley Bank

WHAT HAPPENED TO SILICON VALLEY BANK?

THE CALIFORNIA BANK WAS A BIT OF A SPECIAL BREED. IT CALLED ITSELF “THE FINANCIAL PARTNER OF THE INNOVATION ECONOMY,” AND CLAIMED TO BANK NEARLY HALF OF ALL VENTURE-CAPITAL-BACKED STARTUPS IN THE U-S.

IN OTHER WORDS, IT HAD A PRETTY HOMOGENOUS CLIENT BASE.

NOW COMMERCIAL BANKS USUALLY MAKE MONEY BY TAKING IN CUSTOMER DEPOSITS, AND THEN USING THAT MONEY TO DISH OUT LOANS TO OTHER CUSTOMERS, EARNING MONEY ON THE INTEREST.

BUT FOR THE PAST COUPLE OF YEARS, MANY OF SVB’S CUSTOMERS DIDN’T REALLY NEED LOANS. THE STARTUP WORLD WAS FLUSH WITH V-C CASH BECAUSE, WITH LOW INTEREST RATES, MONEY WAS CHEAP.

BY THE END OF 2022, SVB SAID IT HAD $212 BILLION IN ASSETS.

SO INSTEAD OF MAKING LOANS WITH ALL THE MONEY, SVB BOUGHT UP A LARGE AMOUNT OF INTEREST-BEARING GOVERNMENT BONDS, AND PLANNED TO HOLD THOSE BONDS UNTIL THEY MATURED.

HERE’S WHERE THEIR PROBLEM STARTED.

WITH INFLATION AT 4-DECADE HIGHS, THE FEDERAL RESERVE STARTED HIKING INTEREST RATES, AND FAST.

MONEY STARTED DRAINING OUT OF THE STARTUP WORLD, AND SVB’S CUSTOMERS NEEDED TO TAKE OUT THEIR MONEY TO PAY BILLS AND MAKE PAYROLL.

BUT SVB HAD A LOT OF IT TIED UP IN THESE BONDS. AND BECAUSE INTEREST RATES HAD GONE UP, THEIR LOWER-INTEREST-YIELDING BONDS WERE WORTH LESS ON THE OPEN MARKET.

ON WEDNESDAY EVENING, MARCH 8TH, SVB ANNOUNCED IN A PRESS RELEASE THAT THEY WERE TRYING TO RAISE MONEY BY SELLING MORE SHARES. THEY ALSO SAID THEY SOLD $21 BILLION DOLLARS WORTH OF BONDS – AT A $1.8 BILLION DOLLAR LOSS.

THEY WERE TRYING TO SHORE UP THEIR BALANCE SHEET, BECOME MORE LIQUID – BUT IT CAUSED THEIR CUSTOMERS TO PANIC. BIG TIME VC FIRMS STARTED TELLING STARTUPS TO PULL THEIR MONEY AND IT TRIGGERED A BANK RUN.

ON THURSDAY ALONE, MARCH 9TH, CUSTOMERS ATTEMPTED TO PULL OUT $42 BILLION DOLLARS, 20% OF THE BANK’S TOTAL ASSETS. THAT’S WAY MORE CASH THAN ANY BANK IS REQUIRED TO HAVE ON HAND AND SVB CERTAINLY DIDN’T HAVE IT LIQUID.

STEFAN KALB, SVB CUSTOMER, SHELF ENGINE CEO: We wired out the money yesterday, but Silicon Valley Bank did not honor our wire. So we were not able to move any of our cash out of our bank account. Unless someone comes in and is able to support Silicon Valley Bank through an acquisition, through other means, a lot of us are going to be in a very painful situation very quickly. And so the big ask is for the federal government to come in and step in.

SIMONE DEL ROSARIO: BY FRIDAY MARCH 10TH, FEDERAL REGULATORS TOOK OVER THE BANK AND SHUT IT DOWN. TWO DAYS LATER, ON SUNDAY, NEW YORK-BASED SIGNATURE BANK BECAME THE NEXT CASUALTY, AS CUSTOMERS THERE WORRIED THEIR DEPOSITS WOULD ALSO BE UNSAFE.