The technology sector faces another challenge as Silicon Valley Bank Collapse due to a bank run on March 10, 2023, becoming the second-largest bank failure in US history and the largest since the 2007-2008 financial crisis. It was one of three bank failures in the United States in March 2023.
Mass layoffs in the troubled tech sector made headlines in late 2022 and early 2023. This is yet another setback for the technology industry, and it is the largest bank failure since Washington Mutual in 2007- 2008.
The US government intervened to protect customer deposits. HSBC intends to buy Silicon Valley Bank’s UK operations and The FDIC will acquire SVB’s commercial banking business.
What is Silicon Valley Bank? How big is SVB?
SVB was a state-chartered commercial bank founded in 1983 and headquartered in Santa Clara, California now administered in receivership by the Federal Deposit Insurance Corporation (FDIC) and was the 16th largest U.S. bank before its collapse. They specialized in financing and banking for venture capital-backed startup companies, primarily technology companies.
It had branches in California and Massachusetts and was the largest bank by deposits in Silicon Valley. The bank was part of SVB Financial Group, a publicly traded bank holding company with offices in 13 other states and more than a dozen international jurisdictions.
At the end of 2022, the Silicon Valley-based SVB had assets worth $209 billion, according to the Federal Deposit Insurance Corporation (FDIC). Over half of all venture-backed tech businesses picked SVB, a prestigious banking institution that catered to the IT sector.
What happened with SVB?
Since the pandemic started, Silicon Valley Bank had been purchasing a lot of “safe” assets including U.S. Treasury bonds and mortgage-backed securities. Nevertheless, their fixed interest payments don’t keep up with growing rates when interest rates increase quickly like they did last year. As of the end of last year, the chief risk officer of SVB step down in April 2022, but a replacement wasn’t announced until January 2023 during a time when interest rates were rising. The bank had more than $17 billion in potential losses on those assets, which were no longer worth what the bank paid for them. The bank then experienced a $42 billion tidal wave of deposit withdrawal demands last week. Regulators intervened to liquidate the bank because it was unable to raise the money required to offset the outflows.
How will this affect the financial industry?
One of the most immediate consequences of SVB’s collapse is the disruption of financial services provided to its clients. The collapse of Silicon Valley Bank (SVB) has had a significant impact not only on the United States but also on businesses and countries all over the world. SVB, as one of the world’s largest and most successful banks, has played a critical role in providing financial services to many of the most innovative and high-growth companies in the technology sector.
SVB provided essential financial services such as lending, cash management, and investment banking to many of the world’s leading technology companies. Companies are now having difficulty finding a replacement who can provide comparable services, especially in the short term.
The wider IT industry is significantly impacted by SVB’s collapse. Several of the most cutting-edge and fast-growing businesses in the industry rely heavily on bank financing. After the bank failed, it has become considerably more difficult for these businesses to obtain the finance they require to keep developing and expanding.
Why was SVB important to tech companies?
The majority of the top technological companies in the world have their headquarters outside of the US, and these businesses relied on SVB for crucial financial services. These businesses now face more significant difficulties in obtaining finance and accessing financial services. Because SVB backed new businesses that other banks wouldn’t accept owing to higher risks, they were a favored bank for the technology sector.
The risks associated with its concentration in the technology sector, the regulatory environment, the competitive landscape, and external events must not be overlooked. Businesses and governments around the world should closely monitor the situation and plan for how to overcome this collapse.
Does this relate to cryptocurrency in any way?
Many emerging cryptocurrency businesses found their financial feet with the aid of SVB. Also, several of the greatest names on the web3 used it as their banking partner.
The SVB disaster wasn’t directly related to the current crypto meltdown, but it might make that crisis worse as well. The stablecoin USDC is run by the cryptocurrency company Circle and is backed by cash reserves, $3.3 billion of which are deposited at Silicon Valley Bank. Its stablecoin was supposed to always be worth $1, but after SVB failed, it lost its peg and fell as low as 87 cents. Conversions between USDC and dollars were halted by Coinbase.
What exactly is FDIC insurance?
The Federal Deposit Insurance Corporation, or FDIC, is a separate entity under the control of the US government. Even if an insured bank fails, the FDIC guards depositors of American-based insured banks against losing their money.
FDIC insurance coverage is available to anyone or any entity in an insured bank. To have their deposits insured by the FDIC, a person does not need to be a citizen or resident of the United States.
The entire confidence and credit of the US government support FDIC insurance. No depositor has ever lost a penny of FDIC-insured deposits since the agency’s founding in 1934.
Will SVB customers be reimbursed for their $250,000?
After the collapse of Silicon Valley Bank, the U.S. government took exceptional action to avoid a banking crisis, ensuring all depositors at the failed firm could promptly access all of their money even as another significant bank was shut down.
Simple terms of FDIC:
- FDIC insurance means that any money you have in an SVB bank account up to $250,000 will be fully covered. You will get all that money back.
- For anything over $250,000 in your SVB bank account, Moody’s estimates you will get 80 cents to 90 cents for each dollar deposited.
For SVB Bank, the government agreed to make an exception and reimburse all of their depositors. Two sources of funding are used to support the Deposit Insurance Fund: premiums levied against insured banks and income accrued on money deposited in US government securities. The fund had a balance of $128.2 billion by the end of 2022, according to the FDIC’s website. For comparison, SVB had deposits totaling more than $175 billion at the end of last year.
Conclusion
- Silicon Valley Bank Collapse because of a lack of diversification.
- The most important reason for collapse was the increase in interest rates after the COVID pandemic.
- SVB is a prestigious banking institution that caters to the IT sector.
- SVB disaster wasn’t directly related to the current crypto.
- The government agreed to reimburse all of the SVB depositors.