Why Silicon Valley Bank Failed

Posted by Richard on May 17, 2023

When Silicon Valley Bank (SVB) collapsed, stock markets around the globe went into a tailspin, with some fearing a wider financial meltdown.

Analysts also warned of a startup apocalypse because so many Silicon Valley companies banked with SVB. Many of those startups held large deposits at SVB and, without that money, they might not have even been able to pay staff. Many startups were in danger of financial ruin.

So why did SVB collapse? For many years, SVB bought low-risk U.S. treasury bonds that paid low interest rates. When the Fed started raising interest rates, SVB’s bonds lost value because they were pegged to low-interest rates. This eroded SVB’s financial position and venture capital investors urged startups to withdraw their deposits.

Many of SVB’s clients had deposits far in excess of $250,000, the amount guaranteed by the FDIC. Worried that they could lose deposits, SVB’s clients started to withdraw en masse, demanding about $42 billion in withdrawals in a single day. But SVB used fractional reserve banking, meaning they had only a limited amount of cash to cover limited withdrawals. When withdrawals spiked, SVB lacked the cash to cover them all. SVB wanted to raise cash, but there were no buyers for its lower-interest bonds.

As for the feared wider financial meltdown, FDIC reports that SVB and the bank Silvergate Capital had about $319 billion in total assets, with SVB accounting for most of that. In 2008, 25 banks holding $373 billion in assets failed. In other words, the SVB collapse by itself rivaled the height of the Great Recession, at least in terms of assets held.

In an effort to head off a financial crisis, the federal government stepped in to give SVB’s clients access to all of their deposits.

Financial experts recommend that consumers spread assets across banks. Ideally, you should hold $250,000 or less in a single bank account. This way, you know you’re fully insured by FDIC.