Startup News 1 year ago
startup #investors

The Collapse of Silicon Valley Bank

Silicon Valley Bank was a commercial bank headquartered in Santa Clara, California. SVB was the 16th-largest bank in the United States at the time of its failure on March 10, 2023, and was the largest bank by deposits in Silicon Valley. It was a subsidiary of the bank holding company SVB Financial Group. SVB was the bank for tech startups in Silicon Valley (California). Silicon Valley Bank was the bank that financed and at the same time deposited the money of many such startups.

My impression is that the bankruptcy of the bank represented a deepening of the bursting of the tech and crypto bubble of 2020-2021. We have a new victim of the FED's interest rate hikes in the field most vulnerable to such moves: tech startups. Exactly the field that was in the bubble until 2021.

Here's how I understand things:

  1. In 2020, money became cheap: zero interest.
  2. A lot of money was pumped into tech companies (such as startups) from VCs (venture funds), private investors and the Stock Exchange.
  3. I understand that many such startups kept their money at SVB.
  4. Startups were flooded with cheap money (from investors) which they deposited with SVB;
  5. Accountant, for a bank the deposits of its customers are a LIABILITY and it must place that money in an ASSET to balance the financial situation.
  6. SVB places this money in .... US government securities for fairly long terms because the interest rates in 2020 were very low in the short term and a little higher in the long term. Anyway, inexplicable how they had such a large exposure to long-term government securities (much more risky) for such a small benefit (low interest anyway).
  7. Inflation is coming, in 2021 interest rates start to rise;
  8. Long-term government bonds are devalued massively (a government bond with a term of over 10 years decreases by tens of percent in value when interest rates rise from 0 to 4.5%).
  9. The startups burn cash in their activity and take money from SVB as they have more and more needs.
  10. SVB had a lot of money in long-term state securities - if it doesn't sell them, it loses nothing, if it sells them, it has losses of billions - according to the accounting rules specific to banks.
  11. As the depositors (startups) keep burning cash and withdrawing money, SVB sells government bonds at large losses (over USD 2 billion) and ends up in the situation of needing to borrow in turn to satisfy these requests for withdrawal.
  12. When SVB announces that it wants to attract a financing of about 2.5 billion USD, panic is created in the market regarding the bank's solvency;
  13. The VCs (venture funds that are shareholders in dozens and hundreds of start-ups) send notifications to the startups that SVB is about to withdraw their money immediately.
  14. In one day, more than 40 billion dollars are withdrawn from SVB - and obviously, after such a shock, the collapse occurs.

But there's a happy ending for this story, because the SVB's bank accounts owners were saved by the US state:

Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.
After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

Source - https://home.treasury.gov/news/press-releases/jy1337

Read also - New York Signature Bank is now 3rd for Largest Bank Failures in US History

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