9 questions about Silicon Valley Bank’s collapse, answered
9 questions about Silicon Valley Bank’s collapse, answered
Tech’s favorite bank just failed. What does that mean for you?
If you work in tech, you had probably heard of Silicon Valley Bank before now. If you’re not familiar with this seemingly regional bank, nobody’s blaming you. It had billions of dollars in deposits, but less than two dozen branches, and generally catered to a very specific crowd of startups, venture capitalists, and tech firms. Anyway, you’re here now — Silicon Valley Bank isn’t.
Banking regulators shut down Silicon Valley Bank, or SVB, on Friday after the bank suffered a sudden, swift collapse, marking the second largest bank failure in United States history. Just two days prior, SVB signaled that it was facing a cash crunch. It first tried to raise money by selling shares, then it tried to sell itself, but the whole thing spooked investors, and ultimately, it went under.
The incident has sent shockwaves across the tech sector. Many companies and people with money in SVB moved to pull it out earlier in the week — actions that, ironically, contributed to the bank’s demise. But, presumably not everyone was able to get their cash out, and the FDIC only insures deposits up to $250,000, so customers who had more than that in SVB are in a pickle.
Beyond tech, this has caused some shakiness across the banking industry amid concerns that other banks could be in trouble or that contagion could set in. (It’s important to note for consumers here that, really, the money you have in the bank right now is almost definitely fine.) SVB’s blowup is a big deal and a symptom of bigger forces in motion in tech, finance, and the economy.
Still confused about what’s going on? Here are the answers to nine questions you might just have.
1. What is SVB and how big is it?
Silicon Valley Bank was founded in 1983 in Santa Clara, California, and quickly became the bank for the burgeoning tech sector there and the people who financed it (as was its intention). The bank itself claimed to bank for nearly half of all US venture-backed startups as of 2021. It’s also a banking partner for a lot of the venture capital firms that fund those startups. SVB calls itself the “financial partner of the innovation economy.” All that basically means it’s tightly woven into the financial infrastructure of the tech industry, especially startups.
(Full disclosure: It’s not just the tech industry that banks with SVB. Vox Media, which owns Vox, also banks with SVB.)
This arrangement has been great for SVB when things were great for the tech industry and not so great when they weren’t. But for a long time now, things have been very, very good, and venture capitalists were giving a lot of money to a lot of startups and going through SVB to do it. SVB had more than $200 billion in assets when it failed, which is far less than, say, JP Morgan Chase’s $3.31 trillion or so. But SVB is the largest bank to fail since the Great Recession, as well as, again, one of the largest US banks to fail ever. —Sara Morrison
2. What happened to SVB?
Silicon Valley Bank met its demise largely as the result of a good old-fashioned bank run after signs of trouble began to emerge earlier this week. The bank takes deposits from clients and invests them in generally safe securities, like bonds. As the Federal Reserve has increased interest rates, those bonds have become worth less. That wouldn’t normally be an issue — SVB would just wait for those bonds to mature — but because there’s been a slowdown in venture capital and tech more broadly, deposit inflows slowed, and clients started withdrawing their money.
On Wednesday, March 8, SVB’s parent company, SVB Financial Group, said it would undertake a $2.25 billion share sale after selling $21 billion of securities from its portfolio at a nearly $2 billion loss. The move was meant to shore up its balance sheet. Instead, it spooked markets and clients. The share price of SVB Financial plunged on Thursday. By Friday morning, trading of the stock was halted, and there was reporting SVB was in talks to sell. Big-name VCs such as Peter Thiel and Union Square Ventures reportedly started to tell their companies to pull their money out of the bank while they could.
“People started freaking out, and unfortunately, it would appear rightly so,” said Alexander Yokum, an analyst at CFRA Research who covers banking. By about midday Friday, regulators shut down the bank. —Emily Stewart
3. How did this happen so fast?
Part of SVB’s specific problem is that it was so concentrated in its business. SVB catered to venture capital and private equity — as that sector has done well over the past decade, so has SVB. But because the bank was also very concentrated with high exposure to one industry, that opened it up to risk. When things got bad for its non-diversified group of clients, it very quickly got bad for the bank.
“This has proven that having 50 percent plus of your business in one industry is very dangerous. They outperformed on the way up, but on the way down, that’s when you figure out how exposed you are,” Yokum said.
It didn’t help that another bank, Silvergate, which catered to crypto, said it was winding down on Thursday or, again, that once there were signs of trouble at SVB, everybody kind of freaked out. “This is not a slow fall from grace here, this is quick,” Yokum said. They were one of the largest banks in the US, and they went down in a matter of two days. —Emily Stewart
4. What does this mean for the banking system, and just how worried should I be about my bank?
There’s an argument to be made that it’s good for banks to fail from time to time. The longest stretch in US history without a bank failure was from 2004 to 2007, and well, you know what happened after that. The overall banking industry is likely fine, and again, SVB probably would have made it through had everybody not freaked out at the same time. That said, SVB’s collapse isn’t great, especially for the people who are going to be stuck holding the bag. Bank stocks are sagging, and it’s not impossible that troubles at SVB and Silvergate could prompt issues elsewhere.
“There’s always a risk of contagion, because banking is fundamentally a game of trust and confidence,” said Aaron Klein, a senior economics fellow at the think tank Brookings Institution. “When they erode, the system becomes less stable.”
Yokum, from CFRA, said he wouldn’t be surprised if a couple of other banks run into trouble, but not many — and not the big ones, such as JPMorgan, Wells Fargo, and Bank of America. “It will likely stay concentrated to a few select banks,” he said. “They’re diversified, and they have a ton of deposits. So even if they lose some, they’re still okay. They’re not close to the line of having to sell securities. I really do think it’s banks that cater to high net worth individuals and specialized banks.”
He added there could be more trouble ahead as the Fed continues to increase interest rates in an attempt to cool down the economy and bring down inflation, especially if it does so aggressively. “The more rates go up, the more the banks on the edge start to become a problem,” Yokum said.
Still, you don’t need to start pulling your dollars out of your local bank and hiding them under your mattress. Also, remember up to $250,000 of bank deposits are insured by the federal government, so unless you’ve got more than that in there — which, if you do, congratulations — really, you’re fine. —Emily Stewart
5. What does this mean for tech companies in the near term?
The most immediate issue for tech companies that had money tied up with SVB and haven’t gotten it out yet is a Very Big Question that doesn’t have obvious answers: What happens when I need to pay someone, like my employees?
While the FDIC will guarantee deposits of up to $250,000, depending on the size of the company, that money may not go very far. This doesn’t just apply to companies that deposited cash with SVB — it’s also a question for companies using other SVB instruments, like revolver loans or credit cards. Vox Media, for instance, used SVB cards: This afternoon the company received a message from our chief financial officer, Sean Macnew, telling us that “we are following this closely and working our best to gather information via SVB and other partners.”
There are also real concerns about knock-on effects: Even if your startup doesn’t use SVB, your vendors might, so they may not be able to provide you with services you expect and count on. Even in the optimistic case, where SVB is quickly acquired by another bank and funds start flowing again, the near-term hiccups could be unpleasant for many people. —Peter Kafka
6. Why was SVB important to tech companies, and what made them different than other banks?
One way to gauge SVB’s influence in the tech world was to attend a tech conference, where SVB was often a prominent sponsor (and, sometimes, its executives were also featured speakers).
But most of the connections happened behind the scenes: Unlike other banks, tech industry observers say, SVB was willing to work with tech startups in ways other banks might have been more reluctant to, like helping early employees secure personal loans for a house.
More importantly, SVB was particularly flexible about lending tech startups money even though they didn’t have free cash flow (because tech startups usually lose money at the beginning of their lives) or much in the way of assets (because startups often don’t have much more than the brains of their founders and early employees when they launch). “If you are a startup company, you don’t look like a normal business,” says Sean Byrnes, a startup founder and investor who says he has used SVB for years. “Most banks, if you go to them and ask for a loan, they’ll laugh at you.” SVB was also often willing to work with founders who weren’t US citizens, which would be an obstacle for more traditional banks.
The upside for SVB could be meaningful, since in addition to charging interest, the company often received stock warrants that could pay off if the startup got acquired or went public. And when tech was on a tear, the downside was limited: Even failed companies were more likely to pay back SVB’s loans before other investors got their money back, and there would be a steady pipeline of other tech companies lined up to use their services. —Peter Kafka
7. Did SVB collapse so quickly because it was tied to tech?
It certainly seems that way. That’s in large part because the tech startup world is tightly plugged into itself, with founders and executives constantly trading information and boasting on Twitter or text chains or Signal chats. One tech company pulling their money out of a bank is a story that quickly cascades to the leaders of other companies, who then tell leaders of other companies.
“[SVB was] uniquely susceptible given the communication interconnectedness,” says Charlie O’Donnell, a partner at VC firm Brooklyn Bridge Ventures.
And it wasn’t just tech founders talking to themselves: On Thursday, a wave of venture capitalists were explicitly telling their portfolio companies to take their money out of SVB immediately. A startup founder who doesn’t bank with SVB told Vox he got five calls that day from different investors telling him to pull his money.
Looking forward to the tweets from the VCs who sparked this bank run congratulating themselves on their prescience.
— Matt Harris (@mattcharris) March 10, 2023
O’Donnell says he told his portfolio companies to do the same. He says about a third of the 60-odd companies in his portfolio used SVB, and that by the end of Thursday all except one had pulled their funds.
There are other, related theories floating in techland, which will be harder to prove but certainly seem plausible. One is that tech founders were more susceptible to panic because they were acutely aware of recent crypto crashes, most notably at FTX, and didn’t want to get pulled under. Another is that youngish tech founders generally don’t have longstanding relationships with their banks, and may have never met their bankers in person, making it easier for them to see banks as commodities that can easily be swapped for each other. —Peter Kafka
8. What is FDIC insurance, and how does it work? And will SVB customers get their $250,000 back?
The Federal Deposit Insurance Corporation was created in the wake of the Great Depression, when a lot of banks failed and their customers lost all of their money, to protect consumers who use American banks and provide some stability to the American banking system. If a member bank fails, its deposits — that’s the money you’ve put in said bank — are still insured for up to $250,000. You won’t be wiped out, although anything you’ve got in that bank over $250,000 is not insured, and there’s no guarantee you’ll get it back. The FDIC’s money comes from the fees that member banks pay.
Pretty much every bank in the US is FDIC-insured these days, including SVB. If you had money in SVB, the FDIC says you’ll be able to get it back no later than the morning of Monday, March 13, as long as it’s under that $250,000 cap. Any amount over that will get an advance dividend “within the next week” — that’s a portion of how much the FDIC estimates it’ll be able to recover — and a certificate for however much is left beyond that.
The FDIC is still trying to figure out who exceeds that $250,000 cap and by how much. If you’re one of them, FDIC wants you to call 1-866-799-0959. Good luck.
Although you might not need too much luck. The chance that uninsured balances won’t be covered is pretty slim, despite how grim things may appear now. Observers believe that SVB will be bought, and that buyer will be able to make those uninsured amounts nearly or entirely whole. —Sara Morrison
9. So what does this mean for Silicon Valley and startups in the long run?
If you head to Twitter, you’ll find plenty of people confidently opining about what this will or won’t mean for Silicon Valley’s startup ecosystem in general. That’s a fine use case for Twitter! But for now, we’re going to hold off on that kind of prognostication — at least until we see what happens to SVB’s customers next week. —Peter Kafka
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