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Silicon Valley Bank: What Led to the Collapse of the Billion-Dollar Company?

Silicon Valley Bank, the 16th largest bank in the United States worth more than $200 billion went through a major shocking crisis last Friday, March 10.

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Silicon Valley Bank (SVB) was initiated four decades ago in the heart of a region known for its technological excellence and shrewd decision-making.

Silicon Valley Bank: What led to the collapse of the billion-dollar company?
PHOTO/COURTESY:Silicon Valley Bank.

The business investment company in California grew to become the 16th largest bank in the US, catering for the financial needs of technology companies all over the world, before a series of unfortunate investment decisions led to its collapse.

So what happened?

During the pandemic years, SVB services were in high demand and it was the preferred bank for technological investments. Tech companies used SVB to hold cash used for payroll and business expenses, leading to an influx of deposits. The bank had invested a large portion of the deposits.

The initial market crash of Covid-19 rapidly gave a golden opportunity for startups and established tech companies, as consumers spent big on gadgets and digital services. Customers drawing on their accounts made SVB sell some of its bonds at steep losses.

Silicon Valley Bank: What led to the collapse of the billion-dollar company?
PHOTO/COURTESY:Silicon Valley Bank.

The outcome of its demise was when it invested heavily in long-dated US government bonds, including those backed by mortgages. These were, for all intents and purposes, safe by then.

Bonds have an inverse relationship with interest rates; when rates rise, bond prices fall. Therefore, when the Federal Reserve started to hike rates rapidly to combat inflation, SVB’s bond portfolio started to lose significant value.

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If SVB were able to hold those bonds for a couple of years until they mature, it would receive its capital back. However, as economic conditions worsened over the last year, with tech companies particularly affected, many of the bank’s customers started withdrawing their deposits.

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SVB didn’t have enough cash on hand, therefore it started selling some of its bonds at steep losses, spooking investors and customers.

It collapsed 48 hours after disclosing that it had sold its assets.

What triggered the collapse of the bank?

Given banks only keep a portion of their assets as cash, they are susceptible to a rush of demand from customers.

The run was triggered on 8th March, when it announced a $1.75bn capital raising. It told investors it needed to plug a hole caused by the sale of its loss-making bond portfolio.

Silicon Valley Bank: What led to the collapse of the billion-dollar company?
PHOTO/COURTESY: Silicon Valley Bank.

All of a sudden everyone became alarmed that the bank was short of capital. Customers got the information and were aware of the financial problems at SVB. This prompted them to make huge withdrawals from the bank.

Two days after announcing it would raise capital, the US billion-dollar company collapsed, marking the largest bank failure in the US since the global financial crisis.

Will SVB be saved?

The US government is not saving SVB. It will stay collapsed and the remaining assets will be dispersed to creditors. The bank will only be saved if a buyer will be able to bring it back to life.

Silicon Valley Bank: What led to the collapse of the billion-dollar company?
PHOTO/COURTESY:Silicon Valley Bank.

Late on Sunday, US agencies extended a guarantee to cover all deposits that were made at the bank. Customers at SVB will be able to access all their money on Monday morning. Shareholders in the bank and some unsecured creditors are not protected by the guarantees

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