Why did the Silicon Valley Bank Shut Down

On 10^th March 2023, the Silicon Valley Bank (SVB) was taken over by the U.S Government sending shock waves around the world especially in financial markets. The bank’s closure was the largest one since 2008. To safeguard its depositors, The California Department of Financial protection and Innovation appointed Federal Deposit Insurance Corporation (FDIC) as its receiver.

What was SVB ?

The SVB was a California based bank founded in 1983 and catered mainly to Silicon Valley startups. The tech industry was the biggest customer of SVB. It catered to nearly half of the venture backed startups in U.S. Apart from this, various other SAAS (Software as a Service) firms from across different countries had accounts in SVB. Its main clients also included various venture capitalists and private equity firms.

What happened?

What led to the fall of SVB wasn’t just one factor but a culmination of a number of factors working together. Firstly, the SVB dealt with a specialised type of lending i.e., lending to tech entrepreneurs and startups, venture capitalists and private equity firms. It also catered to technology start-ups facing shortage of equity funds.

These tech entre which got a lot of funding from venture capitalists and private equity firms. Many venture capitalists and private equity firms which were clients of the SVB provided funding to these tech startups, many of which also parked their funds in the SVB. During the covid, in order to give a boost to the economy, the interest rates were kept low. These low rates of interest made funding easy for the tech firms. Many of the startups as a result put these large funds in SVB. Hence, the SVB collected large deposits during this funding boom in 2021. The bank invested these deposits in bonds issued at a low-interest rate that time.

However, as the pandemic condition improved and the economies started opening up, the tech companies started experiencing a slowdown due to uncertainties in the global market. This led to a fall in funding to the tech startup firms leading to a slowdown in the tech sector. With the Russia-Ukraine war in early 2022, the U.S economy started experiencing inflation. As a response to it, the U.S Federal reserve started raising the interest rates in 2022. The rising interest rates, brought down the value of those bonds. As the value of bonds fell, the bank started selling them to cover its losses. As the word spread, the startups and tech-firms having deposits in SVB panicked and started withdrawing their funds from SVB. This led to a mismatch in the assets and liabilities of the bank. On 8^th March, it was announced by the bank that it had sold $21 b worth of bonds at a loss of $1.8 b. When the news further spread, depositors ran to take out their money leading to a further fall in deposits. Thus, forcing the government to take over the bank.

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