The Collapse of Silicon Valley Bank and its Implications

Article by Sameer Chowdhry

In seemingly the largest bank failure since the 2007-2008 financial crisis, Silicon Valley Bank (SVB) collapsed after a bank run. Not only did its financial investments greatly decrease in value, but depositors also withdrew large amounts of money at the same time, which marked the beginning of the end for the bank. 

Background

Founded in 1983, SVB was the 16th largest US bank before its collapse. It specialised in financing and banking for startup companies, mostly in the technology sector. It would emerge as the preferred bank for the technology sector, as it supported companies that not all banks would accept due to their risk profiles. Between 2019-2022, tech companies experienced a period of sustained growth, especially during the pandemic, as they sought for SVB to hold the large influx in cash. This resulted in SVB holding a significant amount of deposits and assets. While a small amount of these funds were made liquid, most of the deposits were used to buy treasury bonds and other long- term debts, such as mortgage-backed securities. 

As the Federal Reserve increased interest rates in 2022 to combat inflation, the market value of these bonds decreased significantly, causing huge losses in its balance sheet. This is because when interest rates rise, existing bonds paying lower interest rates become less attractive, causing their market value to decline. Alongside this, higher interest rates sparked by the Federal Reserve, meant increased borrowing costs throughout the economy. As a result, SVB’s clients began to withdraw money to meet their liquidity needs. This sparked a run on the bank, subsequently leading to its eventual collapse.

Implications

The collapse of SVB has sent ripples across the technology industry, as firms scramble to regain their funds to survive. As SVB was a central component of the tech ecosystem, its unexpected collapse will tighten lending conditions across the sector as a whole. Start-up companies will need to demonstrate stronger financial strategies over the coming years that focus on profitability as well as greater financial discipline to ensure lending from banks. Given its reputation as the leading bank for start- up companies, its collapse means firms may struggle to access its credit lines and wider funding, on top of having to face the possibility of laying off workers or shutting down completely. It is clear then, the collapse of SVB will have a knock-on effect on the technology sector for years to come. 

References

https://www.investopedia.com/what-happened-to-silicon-valley-bank-7368676#toc-what-is-the-bank-term-funding-program 

https://www.techtarget.com/whatis/feature/Silicon-Valley-Bank-collapse-explained-What-you-need-to-know 

https://www.cnbc.com/2023/03/15/svbs-failure-will-have-a-ripple-effect-across-technology-for-years.html 

https://news.cgtn.com/news/2023-03-12/Silicon-Valley-Bank-collapse-could-have-major-impact-on-tech-industry-1i7ecsWD9cc/index.html