You must have heard about Silicon Valley Bank’s downfall, but don’t know what exactly happened. Here we are with another blog on “SVB Downfall-A Story to learn from,” to answer your curiosity.
Silicon Valley Bank
Silicon Valley Bank (SVB) is a commercial bank that primarily caters to the innovation and technology sectors. It was founded in 1983 and the headquarters are in Santa Clara, California. SVB provides a wide range of banking and financial services to startups, venture capital firms, and private equity firms, as well as to established companies in the technology, life science, and healthcare industries.
SVB offers various services including commercial banking, investment banking, private banking, wealth management, and global payment solutions. The bank has offices in the United States, Canada, the United Kingdom, Ireland, China, and India. SVB is also known for its annual Startup Outlook Report, which provides insights into the state of the startup ecosystem.
Overall, Silicon Valley Bank has established itself as a leading financial institution for technology and innovation-focused companies, and has played an important role in supporting the growth of many successful startups and emerging companies.
The Day It Lost the Trust
Now, on March 10th the bank, which had $212bn of assets, failed with astonishing speed, making it the biggest bank to collapse since the global financial crisis of 2007-09.
What happened was that after US Federal Reserve raised interest rates to resist inflation, which terrified the investors from the financial institutions best recognized for their linkages with high-flying world technology startups thinking that the bank won’t be able to recover and they would have to bid farewell to their investment, hence the venture capitalists and ecommerce startups withdrew their amounts causing Silicon Valley Bank to face bank run, which happens when a large number of people start making withdrawals from a bank because they fear it will run out of money.
The bank bought billions of dollars’ worth of bonds over the past couple of years, using customers’ deposits as a typical bank would normally operate, but it reported that it needed $2.25 billion to shore up its balance sheet, and by the end of the following business day customers had withdrawn about $42 billion, hence regulators closed the bank and took control of the assets.
Silicon Valley Bank’s majority customers were largely ecommerce start-ups and other tech-centric companies that started becoming needier for cash over the past year.
Venture capital funding was drying up; companies were not able to get additional rounds of funding for unprofitable businesses and therefore had to tap their existing funds often deposited with SVB, which sat in the center of the tech startup universe.
At first, that wasn’t a huge issue, but the withdrawals started requiring the bank to start selling its own assets to meet customer withdrawal requests.
The fancy tech-focused bank was brought down by the oldest issue in banking and one of the few means that can surely tank a bank: a run on it.
Bank regulators had no other choice but to seize SVB’s assets to protect the assets and deposits still remaining at the bank.
First Citizens Bancshares Comes Forward
First Citizens is based in Raleigh, North Carolina and calls itself America’s biggest family-controlled bank. It has been one of the largest buyers of troubled banks in recent years.
Looking at the downfall of the Silicon Valley Bank, its assets and loans are being brought by them.
The deal was welcomed by the investors, sending First Citizens shares up more than 40%.
The rise helped drive broader gains in banking shares, which have been in strife since SVB’s failure sparked fears over the stability of the sector.
The deal for SVB brings to a close a saga that started earlier this month after a run on the bank forced US regulators to take over. Its collapse was swiftly followed by the failure of another US lender that is Signature Bank.
Under the takeover deal, all 17 former SVB branches will open under the First Citizens brand from Monday. SVB customers are further being advised to continue using their current branch until they receive notice from First Citizens Bank that their account has been fully moved across.
What Will Happen Now?
Currently, experts don’t expect there to be any issues spreading to the broader banking sector.
This will cause instability; as SVB was large but had a unique existence by servicing exclusively the ecommerce, ecommerce startup, technology world and VC-backed companies. It did a lot of work with the particular part of the economy that was hit hard in the previous year.
Lesson in Disguise
One of the most important lessons is the importance of diversification. By relying too heavily on the tech industry, SVB left itself very much vulnerable to fluctuations in that industry. To avoid this, banks should look to diversify their loan portfolios and expand into other industries.
Then risk management because SVB’s downfall was largely due to its exposure to bad debt, which could have been mitigated through proper risk management practices. Banks should ensure that they have effective risk management systems in place to identify and manage risks before they become a problem.
SVB’s downfall highlights the importance of innovation. SVB’s early success was largely due to its innovative approach to serving the tech industry. However, as the industry evolved, SVB failed to keep up with the changing landscape. Banks must continue to innovate to remain competitive and meet the changing needs of their clients.
Hope this blog cleared all your doubts regarding the Silicon Valley Bank’s crash and got a good story to learn from.