California banking regulators pulled the shutters on Silicon Valley Bank (SVB), a lender to some of the largest tech companies in the world, on Friday, 10 March, making it the largest bank to fail since the global financial crisis of 2008.
US regulators closed Silicon Valley Bank and took control of its deposits, a move which puts nearly $175 billion in customer deposits under the Federal Deposit Insurance Corp’s control.
Moreover, it comes after a dramatic 48-hour period that saw SVB’s share prices plummet as fearful customers went on a bank run and flocked to withdraw their deposits.
But how did the high-tech lender, whose clients included Shopify and Andreessen Horowitz, reach its eventual collapse? The Quint explains.
Silicon Valley Bank Collapse: Why Are Indian Startups Sweating? What Next?
1. About the Bank
The 1983-founded California-based Silicon Valley Bank catered to the startup and venture capital (VC) funded tech world and provided multiple services to VC and private equity firms while also offering private banking services to people with high net-worths.
The firm has business with close to half of all the venture-backed startups in the US and 44 percent of US venture-backed technology and healthcare firms which went public in 2022.
As of 31 December 2022, the bank had assets close to $212 billion with clients like Shopify, Pinterest, VC firm Andreessen Horowitz, Crowdstrike and Teladoc Health.
During the massive funding boom in 2021, SVB filled its safe with large deposits amounting to $189 billion, which eventually peaked at $198 billion.
Subsequently, it decided to heavily invest in the bond market, where bonds had been issued at lower interest rates. At the end of 2022, the bank’s balance sheet had amassed securities worth $91.3 billion. Like most other banks, SVB kept just a small percent of their deposits in hand and invested the rest with hopes of a profitable return.
However, in 2022, the US Federal Reserve started raising interest rates to cool inflation, its most aggressive rate hiking campaign in four decades. The move drove down bond holding values which were initially issued at lower rates of interest and moreover, the Fed’s move to raise interest rates also led to VC firms considerably reducing the number of cheques they issue.
Expand2. What Now?
The companies that did receive money over the “funding winter,” received much lesser than they usually would.
The funding winter also put pressure on many of the bank’s clients to pull their deposits out. As a result, the bank was forced to sell their investments at a lower value. In a surprise disclosure on Wednesday, SVB said that it had lost close to $2 billion after selling bond assets worth $21 billion.
A large number of investors like Y Combinator, Peter Thiel’s Founders Fund and Coatue Management have advised the startups on their portfolio to withdraw deposits from SVB. However, the bank has urged its customers to not spread panic and not withdraw funds from the bank.
On Friday, 10 March, the US Federal Deposit Insurance Corporation (FDIC) said that the bank was closed by the California Department of Financial Protection and Innovation less than two days after the SVB tried to persuade clients not to pull their money amid fears that it was low on cash.
The FDIC said, “To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB).”
“At the time of closing, the FDIC as receiver immediately transferred to the DINB all insured deposits of Silicon Valley Bank,” it added.
Following SVB’s closure, close to $175 billion in customer deposits now fall under the control of the FDIC, who have created a new bank, the National Bank of Santa Clara, which will hold SVB’s assets and maintain its usual business activities.
Expand3. What's the India Angle?
Vijay Shekhar Sharma, the founder of Paytm, recalled how the bank was one of his first investors and said, "Long back, by selling to other private investors, SVB exited fully with handsome returns on their total investment of only $1.7 million.
"They neither are a current shareholder (in Paytm) nor invested the amount given here,” Sharma added.
CEO of Mumbai-based Verak Insurance Rahul Mathur said that his company was among those affected by SVB’s close and tweeted, “FDIC (Federal Deposit Insurance Corporation) limit is $250K. Some startups could be at risk of losing big money."
Moreover, Snapdeal’s Kunal Bahl said that SVB lent the company money when their business with hit with a severe cash crunch in 2012.
Investors weren't convinced we could pull it off…Silicon Valley Bank extended a small debt line to us that kept us going. Hope they get past this phase
Kunal Bahl, Snapdeal co-founderMeanwhile, some Indian investors and startups that sell software as a service (SaaS) are shaken after authorities shuttered SVB. Rephrase.ai founder and CEO Ashray Malhotra told Economic Times, “We moved 90% of our money from SVB to Brex in the first half of Thursday--I did it even before recommendation of VC funds.”
Gokul Rajaram, a board member at Pinterest and Coinbase, tweeted, “India-based founders don’t know who to turn to as an alternate to SVB. Likely true for founders in other countries too.”
“From what I hear, SVB was the only bank who’d bank a Delaware C Corp with founders who didn’t have a SSN. Unique, tech forward bank. Shame what’s happening (sic),” Rajaram added.
(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)
Expand
About the Bank
The 1983-founded California-based Silicon Valley Bank catered to the startup and venture capital (VC) funded tech world and provided multiple services to VC and private equity firms while also offering private banking services to people with high net-worths.
The firm has business with close to half of all the venture-backed startups in the US and 44 percent of US venture-backed technology and healthcare firms which went public in 2022.
As of 31 December 2022, the bank had assets close to $212 billion with clients like Shopify, Pinterest, VC firm Andreessen Horowitz, Crowdstrike and Teladoc Health.
During the massive funding boom in 2021, SVB filled its safe with large deposits amounting to $189 billion, which eventually peaked at $198 billion.
Subsequently, it decided to heavily invest in the bond market, where bonds had been issued at lower interest rates. At the end of 2022, the bank’s balance sheet had amassed securities worth $91.3 billion. Like most other banks, SVB kept just a small percent of their deposits in hand and invested the rest with hopes of a profitable return.
However, in 2022, the US Federal Reserve started raising interest rates to cool inflation, its most aggressive rate hiking campaign in four decades. The move drove down bond holding values which were initially issued at lower rates of interest and moreover, the Fed’s move to raise interest rates also led to VC firms considerably reducing the number of cheques they issue.
The companies that did receive money over the “funding winter,” received much lesser than they usually would.
The funding winter also put pressure on many of the bank’s clients to pull their deposits out. As a result, the bank was forced to sell their investments at a lower value. In a surprise disclosure on Wednesday, SVB said that it had lost close to $2 billion after selling bond assets worth $21 billion.
What Now?
A large number of investors like Y Combinator, Peter Thiel’s Founders Fund and Coatue Management have advised the startups on their portfolio to withdraw deposits from SVB. However, the bank has urged its customers to not spread panic and not withdraw funds from the bank.
On Friday, 10 March, the US Federal Deposit Insurance Corporation (FDIC) said that the bank was closed by the California Department of Financial Protection and Innovation less than two days after the SVB tried to persuade clients not to pull their money amid fears that it was low on cash.
The FDIC said, “To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB).”
“At the time of closing, the FDIC as receiver immediately transferred to the DINB all insured deposits of Silicon Valley Bank,” it added.
Following SVB’s closure, close to $175 billion in customer deposits now fall under the control of the FDIC, who have created a new bank, the National Bank of Santa Clara, which will hold SVB’s assets and maintain its usual business activities.
While SVB’s insured depositors will received their insured deposits, the FDIC will sell the bank’s assets and pay dividends to uninsured depositors.
The FDIC also assured depositors that they will have completed access to their insured deposits after the bank opens its branches on Monday, 13 March, and added that the SVB’s old cheques would also be honoured. However, the abrupt collapse of SVB has left trenches of Silicon Valley enterprenuers livid in the dark, while the Biden administration has expressed its “full confidence” in US regulators.
Compared to the United States’ largest banks like JPMorgan Chase and Bank of America, the Silicon Valley Bank and its $209 billion in assets is fairly small.
However, a bank run in Silicon Valley may be of potential concern to fellow financial firms, who would fear a similar panic-driven withdrawal spree in the near future.
However, while shares of New York-based Signature Bank and San Fransisco’s First Republic Bank remained down by close to 20 percent, shares of some of the US’ biggest banks like Wells Fargo, JPMorgan and Citigroup climbed higher on Friday, 10 March.
What's the India Angle?
Vijay Shekhar Sharma, the founder of Paytm, recalled how the bank was one of his first investors and said, "Long back, by selling to other private investors, SVB exited fully with handsome returns on their total investment of only $1.7 million.
"They neither are a current shareholder (in Paytm) nor invested the amount given here,” Sharma added.
CEO of Mumbai-based Verak Insurance Rahul Mathur said that his company was among those affected by SVB’s close and tweeted, “FDIC (Federal Deposit Insurance Corporation) limit is $250K. Some startups could be at risk of losing big money."
Moreover, Snapdeal’s Kunal Bahl said that SVB lent the company money when their business with hit with a severe cash crunch in 2012.
Investors weren't convinced we could pull it off…Silicon Valley Bank extended a small debt line to us that kept us going. Hope they get past this phaseKunal Bahl, Snapdeal co-founder
Meanwhile, some Indian investors and startups that sell software as a service (SaaS) are shaken after authorities shuttered SVB. Rephrase.ai founder and CEO Ashray Malhotra told Economic Times, “We moved 90% of our money from SVB to Brex in the first half of Thursday--I did it even before recommendation of VC funds.”
Gokul Rajaram, a board member at Pinterest and Coinbase, tweeted, “India-based founders don’t know who to turn to as an alternate to SVB. Likely true for founders in other countries too.”
“From what I hear, SVB was the only bank who’d bank a Delaware C Corp with founders who didn’t have a SSN. Unique, tech forward bank. Shame what’s happening (sic),” Rajaram added.
(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)