Failure of Silicon Valley Bank

Key Takeaways from the Failure of Silicon Valley Bank: A Learning Opportunity

Failure of Silicon Valley Bank

The collapse of Silicon Valley Bank (S.V.B.) has sent shockwaves throughout the tech industry, raising questions about the stability of banks with ties to the tech sector and the potential risks of investing in long-dated bonds in a rising interest rate environment. The collapse has also highlighted the unique characteristics of the tech industry, including its extremely online clientele and its herd-following nature.

S.V.B. was a Silicon Valley institution that had earned a gold-plated reputation within the tech community for taking risks on start-ups that other banks would not touch. Founded in 1983, the bank counted many of the tech industry’s best-known start-ups and investment firms as its clients. It was known for providing loans and credit cards to start-ups, as well as mortgages and car loans to tech workers.

However, the bank’s collapse was not caused by risky lending or ill-considered tech schemes. Instead, it was triggered by a classic bank run that started in 2021 and was set off by a series of bad decisions. At the time, the stock market was booming, interest rates were near zero, and money was flooding into the tech sector. Many start-ups parked their cash at S.V.B., and the bank, in turn, invested that money in long-dated bonds. These investments were considered relatively safe at the time but became riskier as interest rates rose and the bonds lost value.

In 2022, as tech investment slowed and start-ups withdrew their cash from the bank to pay their expenses, S.V.B. was forced to sell some of its bonds at a loss and seek fresh capital to meet its obligations. When the bank poorly explained to customers what had happened, some of them got worried that the bank was in trouble. Venture capital investors got spooked and told their portfolio start-ups to withdraw their money from S.V.B. Other customers saw that happening and panicked, triggering a bank run.

While S.V.B. was a small bank by Wall Street standards, it held a privileged position in the tech community. As a result, its collapse has raised concerns about the stability of banks with ties to the tech sector. It has also underscored the importance of relationships in the tech industry, with many start-up founders and investors sharing stories of how they had received their first business loans or credit cards from S.V.B.

The most likely scenario is that a big Wall Street bank will acquire S.V.B. out of receivership and assume its assets and liabilities. This will make depositors whole, but S.V.B.’s equity holders will suffer losses. The fast, orderly transfer of S.V.B.’s assets and liabilities to a new bank is the best-case scenario. A worse scenario would be if no buyer emerges, customers have to wait weeks or months to access their money, and the entire start-up ecosystem collapses because many cannot make payroll.

The collapse of S.V.B. has also highlighted the unique characteristics of the tech industry. S.V.B.’s extremely online clientele may have contributed to its downfall. Tech start-up founders and investors are the kind of people who scrutinize banks’ securities filings, pay close attention to risk and volatility, and talk to each other on the internet all day. Once a few people in tech raised questions about S.V.B.’s solvency, Slack channels and Twitter feeds lit up with dire warnings from venture capitalists, and soon many people were panicking.

This herd-following nature of the tech industry makes it particularly vulnerable to bank runs, as panic can spread quickly online. While it is possible that a bank run could have occurred even if S.V.B.’s clientele had been made up of restaurant owners and dog groomers, it seems unlikely.

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