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Silicon Valley Bank shutdown: How it happened and what comes next

SVB lost $1.8 billion, and that marked the beginning of the end for the bank. Silicon Valley Bank’s four-decade run as the tech world’s preferred lender came to sudden end Friday after the feds shut down the embattled firm due to liquidity fears. Before the shutdown, some banking analysts dismissed concerns about a potential “contagion” stemming from SVB’s problems that could unsteady the banking sector — though without ruling out the possibility that the bank could fail.

Crypto firm Circle operates a stablecoin, USDC, that’s backed with cash reserves — $3.3 billion of which are stuck at Silicon Valley Bank. That stablecoin should always be worth $1, but it broke its peg after SVB failed, dropping as low as 87 cents. The next day, the emblematic bank of the tech industry was shut down by regulators — the second-biggest bank failure in US history, after Washington Mutual in 2008. Mark Warner, a Virginia Democrat on the US Senate banking committee, said SVB had been “caught in a bind” by higher interest rates. A run on the bank last week, with $42bn withdrawn on Thursday alone, was accelerated by “some actors”, he told ABC’s This Week.

This doesn’t just apply to companies that deposited cash with SVB — it’s also a question for companies using other SVB instruments, like revolver loans or credit cards. A lot of other banks are also losing money on their securities. But the gossipy nature of Silicon Valley, and the fact that so many of these firms are entwined, made the possibility of a bank run higher for SVB than it was for other places. Right now, rumors are flying in WhatsApp groupchats full of founders scrambling for cash. I suspect, too, that we’ll start seeing scammers attempting to target panicky technology brothers, to extract even more cash from them. It’s got a bunch of assets that are worth less money if interest rates go up.

On March 11th, Circle said that it “will stand behind USDC and cover any shortfall using corporate resources, involving external capital if necessary.” The stablecoin’s value mostly recovered. We are interested in talking to you about everything happening with the recent spate of tech-related bank closures. By Elizabeth Lopatto, a reporter who writes about tech, money, and human behavior. crypto tokens vs coins whats the difference Our Healthcare Investments and Exits report looks back at the 2023 and offers insights and commentary around the evolving healthcare innovation market in 2024 and beyond. It will also sell off SVB’s assets to be used for future disposition. As of Monday, the CME FedWatch Tool indicated the probability of an increase next week is between no hike and a 25-basis-point hike.

  1. “Most banks, if you go to them and ask for a loan, they’ll laugh at you.” SVB was also often willing to work with founders who weren’t US citizens, which would be an obstacle for more traditional banks.
  2. The FDIC formally took control of its assets on Friday after the bank was shut down by the California Department of Financial Protection and Innovation.
  3. The longest stretch in US history without a bank failure was from 2004 to 2007, and, well, you know what happened after that.
  4. When the Federal Reserve made its announcement, it clarified that none of the losses would be taken on by taxpayers.

So while one very likely outcome is that the uninsured depositors will eventually be made whole, the problem is that right now they have no access to that money. The failure of SVB “could be the first cockroach in the cellar”, the investment manager Fredric Russell told the Wall Street Journal. The failed bank was reportedly without a risk management officer for months before it collapsed. Regional banks have seen their values plunge since SVB’s woes emerged. New York-based Signature Bank provides banking services to law firms. Regulators said the decision to close it came “in light of market events, monitoring market trends.” Other banks including First Republic Bank, Western Alliance and PacWest have also been hit by SVB’s fall.

Impact on Depositors and Investors

The bank itself claimed to bank for nearly half of all US venture-backed startups as of 2021. It’s also a banking partner for a lot of the venture capital firms that fund those startups. SVB calls itself the “financial partner of the innovation economy.” All that basically means it’s tightly woven into the financial infrastructure of the tech industry, especially startups. Founded in 1983, the Santa Clara, Calif.-based institution provided banking services and took deposits for Silicon Valley startups, venture capital firms and tech heavyweights. On Wednesday evening, SVB announced it was planning to raise $2 billion to “strengthen [its] financial position” after suffering losses amid the broader slowdown in tech sector.

What happens to Silicon Valley Bank’s customers?

That appears to have morphed into a self-fulfilling prophecy, with tech titans including Peter Thiel reportedly warning startup founders to reduce their exposure to SVB. The move caused a wider sell-off in stocks and sparked fears that other banks may be at risk of failure. Silicon Valley Bank, one of the leading lenders to the tech sector, was shut down by regulators Friday over concerns about its solvency.

Well, my children, according to the most recent annual filing from SVB, bank deposits grew as IPOs, SPACs, VC investment and so on went on at a frenetic pace. “The American banking system is really safe and well-capitalised, it’s resilient,” Yellen told CBS’s Face the Nation. “Americans can have confidence in the safety and soundness of our banking system. Yellen said conditions did not match the 2008 financial crisis, when the collapse of large institutions threatened to bring down the global financial system. She also sought to calm fears the $23tn US banking system could be affected by the fall of a regional bank. Two banks have collapsed since Friday, the federal government swooped in to save the day, and there’s still a lot of uncertainty about what comes next.

It had billions of dollars in deposits, but fewer than two dozen branches, and generally catered to a very specific crowd of startups, venture capitalists, and tech firms. Startups started drawing down more of their money to pay for their expenses, and SVB had to come up with cash to make that happen. That meant the bank needed to get liquidity — so it sold $21 billion of securities, resulting in an after-tax loss of $1.8 billion.

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While that leaves out shareholders and “certain” unsecured debt holders, it meant that the bank’s customers could mostly resume business on Monday. There are lots of people who are wondering if their next paycheck will be disrupted. Some people already know their paychecks will be; a payroll service company called Rippling had to tell its customers that some paychecks weren’t coming on time because of the SVB collapse. For some workers, that’s rent or mortgage payments, and money for groceries, gas, or childcare that isn’t coming. Even small disruptions to cash flow can have drastic effects on individuals, companies, and industries.

In other words, if you had $250,000 in a Silicon Valley Bank account, you would get all of your money back. Despite being the 16th largest bank in the country, Silicon Valley Bank didn’t have enough assets to be subject to the extra rules and oversight. If the threshold was never changed, SVB would have been more closely watched by regulators. Some people believe that Silicon Valley Bank’s failure started far earlier with the rollback of the Dodd-Frank Act, which was the major banking regulation that was put into effect in response to the financial crisis of 2008. During a poker game, Bill Biggerstaff and Robert Medearis came up with the idea for Silicon Valley Bank. And in 1983, the two, along with the bank’s CEO Roger Smith, opened the first branch in San Jose, California.

Deposits are FDIC-insured only up to $250,000 regardless of whether the account was individual or corporate. More than 90% of SVB’s deposits were not insured by the FDIC, according to a Bloomberg analysis of recent regulatory filings. SVB was known as the bank of choice for startups, venture capitalists and tech companies. Its collapse Friday raised questions for some companies about whether they would be able to meet payroll. Silicon Valley Bank was founded in 1983 in Santa Clara, California, and quickly became the bank for the burgeoning tech sector there and the people who financed it (as was its intention).

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