by smallilicon Valley Bank was aptly named: It held the capital of hundreds of US technology companies and was a critical player in the valley’s economy. But on Friday, it became the second largest bank failure in US history after a surge in its deposits. About $175 billion in customer accounts were taken over by the Federal Deposit Insurance Corporation (FDIC), which is now charged with refunding the bank’s customers.
But more than 85% of the bank’s deposits were uninsured, according to estimates in a recent regulatory filing. That’s because FDIC deposit insurance is for everyday bank customers and is up to a maximum of $250,000. Many Silicon Valley startups had millions, or even hundreds of millions of dollars in the bank—money they used to run their companies and pay their employees. Right now, no one is sure how much of that cash is left.
The tech sector is already navigating a tough macroeconomic climate, with layoffs mounting and stock prices plunging. The fall of Silicon Valley Bank is likely to exacerbate these problems – and could threaten the wider economy. “It’s like a Lehman Brothers moment for Silicon Valley,” says a Silicon Valley startup founder whose company has millions of dollars tied up in SVB. “It feels like something that should never have happened, because it’s such a trusted entity.” The person spoke on condition of anonymity because they are concerned about losing customers because of their ties to SVB.
Bad bets
SVB was founded in 1983 and is headquartered in Santa Clara, which is right in the middle of Silicon Valley. The bank was the 16th largest in the country and has long prided itself on its close relationship with tech entrepreneurs, calling itself a “financial partner of the innovation economy”. The bank he claimed by the end of 2022, “nearly half” of all US venture-backed startups were using its services.
But on Wednesday, SVB said it was facing a liquidity squeeze and was holding an emergency fundraise and selling US Treasuries at a loss to shore up its position. This announcement caused widespread panic throughout the Valley, with many companies scrambling to pull their money out before it was too late.
As fears spread, investors pulled out of bank stocks on a larger scale, with the four biggest US banks losing about $52 billion in market value on Thursday.
Many technology leaders urged the companies that worked with SVB not to panic or withdraw their money. But the risk for these startups was too high and a self-fulfilling bank run ensued. SVB’s share price fell 60% on Thursday and trading was halted on Friday morning. By noon, the FDIC had taken control of the bank. The only bank failure bigger than this in American history was Washington Mutual, which had about $300 billion in customer deposits before the 2008 financial crisis.
Most banks, by nature, use their customers’ deposits to make loans and then make money on the spread, which allows them to earn income and their customers to earn interest. But financial institutions are currently facing a changing economic climate in which the free money era of ultra-low interest rates is over as the Federal Reserve tries to contain inflation by making it more expensive to borrow.
Some seemingly smart investments banks made two years ago have since turned sour, says John Rizzo, senior vice president of public affairs at D.C.-based Clyde Group. That was a big part of SVB’s problem: $91 billion worth of bonds (a typically safe investment) that the bank bought with customer deposits had lost about $15 billion in value because of interest rate hikes.
(Rizzo also pointed to the struggles of crypto-focused Silvergate Bank, which announced it would close operations this week.) “When interest rates are rising and money is tighter, you tend to find out who has made bad bets.” , says. “You can see the bubble burst in some of these risk assets, and over the last couple of weeks, we’ve discovered which financial institutions were overexposed to them.”
Chasing Insurance
SBV’s failure has immediate ripple effects in Silicon Valley. The aforementioned startup founder said they started banking with SVB right when they founded their company several years ago, “because it seemed like the de facto standard.”
“It’s been around for 40 years,” they said. “It was a very reliable entity that everyone seemed to store money in.”
The founder’s company held all its assets, worth millions of dollars, in SVB. When the panic set in on Wednesday, the founder started thinking about withdrawing his money, but said the process of setting up a brand new bank account would take several days.
The FDIC said customers will have full access to their insured deposits of up to $250,000 next Monday. But $250,000 is “chump change” compared to what most tech companies stash at SBV, the founder says. They estimate that “hundreds if not thousands of companies” have millions of dollars tied to the bank.
“FDIC insurance is designed to give the everyday depositor the confidence that in a run, they can get their money back,” Rizzo says. “But as we’re finding, this creates a significant problem if you go too far over the limit.”
The founder says their company is in a better position than many others: because the company is generating revenue and their team is only about 30 people, they will be able to make payroll for the next few months. After that, they’re not so sure. “We don’t know if we will need to lay off or lay off employees. We don’t know if we will ever get the money beyond the sum insured,” they said.
And many startups in Silicon Valley generate no revenue at all, instead relying on fundraising rounds from venture capital firms. “Let’s say you’re a startup that banked with SVB, raised $100 million, is burning through a million dollars a month, and has no revenue,” says the founder. “You’re actually crazy.”
The founder says a common sentiment they’ve heard from other tech entrepreneurs is that “people are hoping that someone, whether it’s the government or a bigger bank, will bail out the remaining depositors.” Some financial veterans, including former Treasury Secretary Larry Summers, have begun calling on the government to ensure depositors are made whole, even if their accounts exceed $250,000.
The failure of SVB sent tremors throughout the banking system. Similar-sized institutions, including First Republic Bank, Signature Bank and PacWest Bancorp, all suffered double-digit share declines.
The founder says SVB’s failure could fundamentally change the way money flows in Silicon Valley, with people perhaps becoming more hesitant to trust smaller institutions. “People will be a lot more careful, and that’s bad,” they say. “It can put more money in the hands of the bigger players.”
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