Silicon Valley Bank, a financial institution best known for its connections to high-flying international technology firms and venture capital, failed on Friday as a result of one of the oldest issues in banking: a bank run.
Since Washington Mutual went down at the height of the financial crisis more than ten years ago, its demise is the biggest financial institution disaster. And those impacts came right away. Other firms with connections to the bank struggled to pay their staff and feared they could have to postpone plans, fire, or furlough personnel while they waited for funding.
What led to this? Here is all you need to know about the bank’s failure, who was most impacted, and whether or not it will have an impact on the country’s larger financial sector.
The decline in technology stock prices over the previous year and the Federal Reserve’s aggressive intention to raise interest rates to fight inflation both had a significant negative impact on Silicon Valley Bank.
For the last couple of years, the bank purchased bonds worth billions of dollars using customer deposits, as a conventional bank would. Although these investments were generally safe, their value decreased because they carried lower interest rates than a comparable bond would have if it had been issued in the current climate of higher interest rates.
In most cases, this is not a problem because banks keep those for a very long period, unless they are forced to sell them in an emergency.
Yet most of Silicon Valley’s clients were start-ups and other tech-focused businesses, which over the previous year started to become more in need of funding. Due to a lack of venture capital investment, firms were forced to use their existing cash reserves, which were frequently placed with Silicon Valley Bank, which was located in the heart of the tech startup universe.
Customers in Silicon Valley then started taking their deposits out. That wasn’t a big deal at first, but as withdrawal requests increased, the bank had to start selling its own assets to cover them. Since the majority of the clients in Silicon Valley were corporations and wealthy individuals, they were probably more concerned about a bank failure because their accounts exceeded the $250,000 cap on deposit insurance set by the government.
This entailed selling generally secure bonds at a loss, and as a result of those losses, Silicon Valley Bank virtually went bankrupt. The bank looked for outside investors to help raise more money, but it was unsuccessful.
The oldest problem in banking—a good ol’ run on the bank—destroyed the fancy tech-focused bank. Bank regulators were forced to seize Silicon Valley Bank’s assets in order to safeguard the assets and deposits that were still held by the bank.
There are still two significant difficulties with Silicon Valley Bank, but both of them could cause other problems if not addressed very away.
The huge deposits at Silicon Valley Bank are the most pressing issue. Deposits up to $250,000 are insured by the federal government, but deposits above that amount are not. As of Monday morning, protected deposits would be accessible, according to the Federal Deposit Insurance Corporation. Yet, due to the fact that Silicon Valley Bank’s clients were primarily startups and well-off tech employees, a distinctive feature of the bank was the vast majority of its deposits not being insured.
All of that money is currently unavailable, and it will probably need to be released in a systematic manner. Nevertheless, many firms are unable to wait weeks to get the money they need to pay employees and cover office costs. That might result in layoffs or furloughs.
Also, Silicon Valley Bank has not found a buyer. The assets of a bankrupt bank are typically acquired by a stronger bank, but in this case, no stronger bank has expressed interest. A bank purchasing Silicon Valley Bank might significantly help to solve some of the issues related to the money that entrepreneurs are currently unable to access.
Now, no, and experts don’t anticipate any problems extending to the larger banking industry.
Although being big, Silicon Valley Bank stood apart because it catered almost entirely to the IT sector and venture-backed businesses. It made significant progress with the area of the economy that took a beating last year.
Some banks have much wider geographic, client, and industry diversification. The top banks and financial institutions’ most recent round of “stress tests” by the Federal Reserve revealed that all of them would withstand a severe recession and a sharp increase in unemployment.