What Happened at Silicon Valley Bank, In Plain English

Karen Finerman  |  March 12, 2023

Silicon Valley Bank was THE bank to the venture capital (VC) and tech sectors. (For example, Roku had close to $500 million with the bank, and Roblox had around $150 million.) A huge percentage of the companies that banked with Silicon Valley Bank did so as depositors, borrowers, or both… So, where did it all go wrong? 

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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 extraordinarily quickly from 2019 to late 2022. Ironically, in an effort to be conservative, the bank took the deposits it received and bought traditionally secure US Treasuries and Government Mortgage backed securities (MBS). 

As interest rates rose (due to the Federal Reserve purposely raising rates to return to bring the economy in for a soft landing after the pressures of the pandemic) several things started to happen that sewed the seeds of Silicon Valley Bank’s eventual failure: Venture-backed companies had a much 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. But, even more critical was the effect that higher interest rates had on the value of those very safe and secure investments in US Treasuries and MBS.

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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) and 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.) But here’s the problem, given that today’s interest rates are now much higher: If you’d bought that bond 2 years ago and now needed to sell it, you’d only be able to get about $880 for it a significant loss. But, Silicon Valley Bank didn’t have a choice, because they needed the cash to pay their 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, so they pulled all their money out. Also, some depositors realized that with higher interest rates, they could get a much better return by pulling their money out and then buying treasuries. It didn’t take long before a vicious cycle started; Silicon Valley Bank desperately needed 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. The stock got crushed, and things unravelled quickly once many famous VC investors told their VC-backed companies to pull their money out of the bank. Essentially, kerosene had been added to the fire that was already burning, and the bank was overwhelmed with depositors looking to get their money out. Collapse was inevitable… And the failure of SVB was followed by the collapse of Signature Bank. On Monday, stocks of other regional banks were down big, though they snapped back at least somewhat by Tuesday morning.

So, where did Silicon Valley Bank’s customers go, exactly? We don’t know yet, but the most likely place is JP Morgan. JP Morgan is the largest and safest bank in the US. There are 8 banks in the US identified as SIBs (Systemically Important Banks). These are banks that are considered “too big to fail.” They’re subject to greater scrutiny and regulation to ensure their structure is sound. JPM is the biggest of these and considered the safest banking institution in the US. 

The FDIC, the Federal Deposit Insurance Corporation, which insures depositors in American banks up to $250,000, stepped in and took over both Silicon Valley Bank and Signature Bank. For a time, it was unclear if depositors with balances over the FDIC-insured amount would be able to get their money back. But thankfully depositors in both Silicon Valley Bank and Signature Bank have been backstopped by the government and won’t lose a thing (although stock and bondholders in the failed banks are out of luck.) But 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,” which gave them the leeway to insure otherwise uninsured deposits.

It’s too early to say exactly what will happen next — And, while a weekend attempt at selling off Silicon Valley Bank via auction failed, the FDIC is planning to try again. If I had to venture a guess to the outcome here, it would be that JPM, Bank of America, Morgan Stanley, or some combination of the three will buy Silicon Valley Bank.

Together with HerMoney’s founder and CEO Jean Chatzky, Karen Finerman runs InvestingFixx, HerMoney’s investing club for women. We discuss the markets and dig into investments. Join us and learn more here!


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