The state of California’s financial and banking regulators have decided to close down Silicon Valley Bank, a well-known banking institution located in Santa Clara, California. This action was taken due to the bank’s deteriorating financial situation, which has been experiencing significant losses over the past few quarters.
What is Silicon Valley Bank?
Founded in 1983 and based in Santa Clara, California, Silicon Valley Bank (SVB) is a commercial bank that specializes in providing financial services to technology and life science companies, venture capitalists, private equity firms, and high-net-worth individuals.
With additional offices located in the United States, the United Kingdom, China, and India, SVB has become a prominent banking partner for these industries and has contributed significantly to the growth and success of many startups and established companies. SVB which was founded in 1983 became the 16th largest bank in the United States with total assets of 210 billion dollars.
Silicon Valley Bank which is a financial institution that primarily caters to the needs of information technology firms, as well as health and insurance companies, has been facing significant losses as a result of a slowdown in the tech sector. The bank has been affected by macroeconomic conditions and the ongoing war in Ukraine, which has resulted in a decline in revenue and profits for tech companies around the world, especially in Silicon Valley.
How it all started?
In 2022, Silicon Valley Bank experienced significant losses due to the inflationary pressures in the United States that caused interest rates to rise. The bank had invested deposits from multinational corporations (MNCs) and high-net-worth individuals in long-term bonds that offered higher interest rates than short-term bonds. However, the value of these long-term bonds decreased, leading to substantial losses for SVB.
In addition to the bond market losses, many of SVB’s major startup and tech company customers withdrew their deposits to mitigate the impact of rising operational costs. This increased the strain on SVB’s liquidity, resulting in a liquidity crisis.
To bolster its financial position, SVB announced that it is planning to raise $2 billion. The bank acknowledged that the value of its securities had declined due to the higher interest rates.
By March 9th, 2023, Silicon Valley Bank’s shares experienced a significant drop in the stock markets. The sell-off of a large number of shares forced the bank’s management to explain. CEO Gary Becker appealed to tech investors to remain calm, stating that the only threat to SVB was if people spread rumors of the bank being in trouble.
However, Becker’s request did not have a significant impact on the bank’s performance in the stock market, as the share price continued to fall. Various stock market analysts and investment experts advised investors and tech companies to reduce their exposure to the declining SVB. By the end of Thursday, the bank’s stocks had fallen by nearly 60%.
On Friday, various news portals reported that the bank failed to raise 2 billion dollars to strengthen the financial situation and was looking for a buyer. Soon the California state and federal banking regulators strung into action and announced that they have taken control of deposits and put the bank in receivership of The Federal Deposit Insurance Corporation (FDIC).
What happens now?
Regulators and The Federal Deposit Insurance Corporation (FDIC) will now account for the assets and liabilities of SVB and later sell the assets of the bank. Receipts from the sale of assets will be forwarded to debtors, shareholders, stakeholders, depositors, etc.
Impact on startups and tech companies – Various tech companies and startups such as Roku Inc, Roblox Corporation, USD Coin, Vox Media, etc have significant financial reserves and transactions with the Silicon Valley Bank. SVB was a financial institution that gave large amounts of funds to startups and tech companies despite the risk factor. This had made the bank more attractive for startups.
The decline of SVB could have serious implications for the financial positions of these tech companies and startups. They may need to explore other financial options or take out loans to keep their businesses operational.
Impact on financial and banking system –
Although major US banks have performed strongly in the last quarter, the decline of Silicon Valley Bank (SVB) has raised concerns among analysts about the stability of other banks. As shares plunged on the stock market, various banks such as First Republic Bank and Western Alliance reassured investors that their liquidity and deposits were still strong, to quell fears of a contagion effect from SVB’s fall.
Reports indicate that both American and European banks suffered significant losses in the stock market in recent sessions due to the fall and closure of SVB.
Personal banking – Apart from financial services to companies and firms, SVB also used to provide personal banking services to high-net-worth individuals and several employees working in silicon valley. A large number of these customers have big amounts of money parked in the bank as savings and Reserves. And the fact that the maximum insurance amount is 250000 makes the situation more alarming.