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How Silicon Valley Bank Failed and What Happens Next

How SVB Failed and What Happens Next

The speed with which it occurred has left many wondering how Silicon Valley Bank (SVB) failed and what happens next. Here is a brief rundown.

The seeds of SVB’s collapse were planted over a year ago. Those seeds do not include recklessness or corruption. In fact, the bank’s failure is the result of its success in raising deposits and commitment to safe long-term investments.

What Happened Friday

California bank regulators took control of SVB Friday temporarily freezing accounts and closing all branches. Subsequently, the Federal Deposit Insurance Corporation (FDIC) was named receiver. The FDIC then created a new bank that acquired all insured deposits. 

The FDIC provides insurance on member bank accounts up to $250,000. Because SVB was an FDIC member bank, that insurance protection is in force. However, some depositors have much more than the insurable limit in their accounts. 

What Happens Monday

According to the FDIC, all 17 SVB locations in California and Massachusetts will open Monday and maintain normal business hours. In addition, online banking will resume no later than Monday.

All customers with insured funds will have full access to their funds, according to the FDIC. 

Those with deposits above the insured amount will receive an “advance dividend” sometime next week. More money may be paid to those customers as assets are sold.

Though loan origination will cease, those who currently have loans with SVB are required to continue making payments. 

How Did This Happen

SVB became the lender of choice for many tech startups over the last few years.

“We bank nearly half of all US venture-backed startups, and 44% of the US venture-backed technology and healthcare companies that went public in 2022 are SVB clients,” the bank posted on its website

SVB’s deposits rose dramatically on the accelerating valuations and stock prices of its venture and tech customers. In a two-year period (2019 – 2021) deposits nearly tripled from $62 billion to over $189 billion.

As a result, SVB needed somewhere to invest all that money.  The bank did what many prudent investors do – they went for the safety of long-term Treasury and Mortgage Bonds. Unfortunately for the bank and its customers, those investments were stuck at record-low rates.

Then, in March, the Federal Reserve began raising interest rates. Each Fed hike diminished the value of SVB’s bond portfolio. At the same time venture capital dried up and the IPO market went into hibernation. 

As a result, the bank’s clients began increasing withdrawals. That led SVB to sell investments that resulted in a $1.8 billion loss on Wednesday. By Thursday, depositors and investors were heading for the exit. Consequently, the SVB stock dropped 60 percent. 

You know what happened next.

Who Gets Hurt

Individuals with deposits of $250,000 or less will be able to get their money Monday. They will have suffered a weekend where they could not go to an ATM.

Those who will feel the most pain from SVB’s downfall are its bread-and-butter clients – startup companies. There are stories of small companies scrambling to transfer their SVB accounts to other banks. However, many of those companies could not move fast enough to get that done.

As a result, those firms are waiting to see if and when their funds can be recovered. Consequently, with Wednesday being the 15th, many of those companies and their employees are wondering if they will be able to make payroll.

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