The stunning fall of Silicon Valley Bank (SVB) — seized on Friday by the U.S. federal government — was the second-largest in the country’s banking history since Washington Mutual’s failure in the 2008 subprime crisis. And while the collapse was not the result of fraud, it won’t be any less destructive.
SVB was one of the most prominent lenders in the tech world, and its downfall is set to put the startup ecosystem even more on edge. Trouble began last year due to rising interest rates and a post-pandemic adjustment in demand for digital products and services, leading SVB depositors to withdraw more funds than planned and question their yield model deposits with the bank.
SVB’s first big problem is that over half of its assets were leveraged in U.S. government securities or government-backed mortgage bonds. With the U.S. Federal Reserve raising interest rates as a way to curb the country’s growth and contain inflation, the prices of these bonds began to fall. Then comes SVB’s second problem.
To cope with the increase in customer withdrawals, SVB had to sell part of these investments, setting off alarm bells among investors. Weeks later, on March 8, it announced a plan to sell USD 2.2 billion in shares to help shore itself up. However, it did so by using expressions like “strong capital position,” which spooked investors even more.
Moody’s downgraded the bank’s credit rating soon after. This operation caught the attention of investors, mainly venture capital companies, which saw the institution’s fragility and advised their investors to withdraw their money from SVB.
And then came SVB’s third and most significant problem: a bank run, that is, the lack of liquidity due to the massive withdrawals. The bank lost a quarter of its deposits (USD 42 billion) from Thursday to Friday...
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