Silicon Valley Bank was a big deal to venture capitalists (VC) and tech sectors. For example, streaming company Roku had close to $500 million with the bank and the gamers at Roblox had around $150 million. A huge percentage of the companies that banked with Silicon Valley Bank did so as depositors, borrowers, or both. But in March, Silicon Valley Bank failed and was shut down by the California Department of Financial Protection and Innovation. So where did it all go wrong?
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Silicon Valley Bank During COVID-19
First, a necessary bit of background. During and after the pandemic, VC and tech companies raised an extraordinary amount of money to invest in and to run young companies. Much of that money ended up at Silicon Valley Bank. The bank grew fast from 2019 to late 2022. But to be conservative, the bank took the deposits it received and bought US Treasuries and Government Mortgage backed securities (MBS).
Then the Federal Reserve raised rates to return to bring the economy in for a soft landing after the pressures of the pandemic. Soon after, several things started to happen that sewed the seeds of Silicon Valley Bank’s eventual failure. First, venture-backed companies had a harder time raising money in a higher interest rate world. So they started to spend down the money they’d deposited at Silicon Valley Bank.
For example, on March 10, 2021, a US Treasury bond set to mature in 10 years paid the then-going interest rate of 1.75%. The price of those bonds was $104. Which means for a $1,000 bond, you would pay $1,040 and get interest payments every year of 1.75% (equaling $17.50 for each $1,000 bond). Then you’d get back $1,000 at maturity. (Remember interest rates were very, very low then. Also remember that when rates move up, the price of bonds moves down.)
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Where It Went Wrong for Silicon Valley Bank
But here’s the problem: today’s interest rates are now much higher. If you’d bought that bond two years ago and now needed to sell it, you’d only be able to get about $880 for it. This is a significant loss from what you bought it at. Silicon Valley Bank didn’t have a choice because they needed the cash to pay depositors who were taking money out. Some depositors started to get worried about this problem at Silicon Valley Bank, and feared the bank might be headed for trouble. This is when they pulled all their money out. Some depositors realized they could get a much better return by pulling their money out and buying treasuries.
It didn’t take long before a vicious cycle started. Silicon Valley Bank had to raise money to fill the holes left when they sold their treasuries at a loss. The bank attempted a large stock sale to shore up their balance sheet, but by then a classic bank panic was underway. Once many famous investors told their VC-backed companies to pull their money out of the bank, the stock plummeted. It was as if kerosene was thrown into the fire that was already burning. The bank got overwhelmed with depositors looking to get their money out.
Failure was inevitable. After SVB was the collapse of Signature Bank. In the days that followed, stocks of other regional banks were falling, though they snapped back at least somewhat soon after.
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What Happened to the Customers of Silicon Valley Bank?
So, where did Silicon Valley Bank’s customers go? First Citizens Bank made a deal with the Federal Deposit Insurance Corporation, or FDIC, to buy Silicon Valley Bank’s deposits and loans. The FDIC assured customers that their deposits would be made whole, even if all of their funds weren’t protected by the FDIC.
How is it possible that depositors will get all their money back, even if they had millions in the bank? The government designated both banks as “systemic risks to the financial system.” This gave them the leeway to insure otherwise uninsured deposits.
Is Your Bank Safe From Failure?
With the collapse of a few banks earlier this year, you might be concerned about your bank. For the most part, your bank is probably safe from a similar failure that SVC and Signature Bank faced. But there are ways you can check to see if your money is secure where it is or if you should move it.
See if your bank is FDIC-insured. The FDIC insures individual bank accounts up to $250,000 and joint accounts up to $500,000. Staying below those figures means you’re always ensuring all your money is safe. Choosing between a neighborhood bank or mega financial institution is up to you. How you prefer to bank impacts your preferences, so make sure you go with the one that offers the most security and also fits your individual needs.
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