Inside the Silicon Valley Bank Collapse: What Really Happened

In March 2023, Silicon Valley Bank (SVB) suffered a major collapse that sent shockwaves throughout the financial industry. As entrepreneurs and investors scrambled to make sense of the situation, questions arose about the causes of the collapse, its impact on the broader economy, and how similar disasters could be prevented in the future.

In this blog post, we'll discuss the SVB collapse and its implications for the banking sector. We’ll also assess the collapse using the insights and expertise of Seoyoung Kim, the Program Director for Santa Clara University's Online Master's in Finance and Analytics (MSFA) program.

On March 8, 2023, SVB announced that it had raised $500 million from General Atlantic and planned to raise another $1.25 billion through a common stock sale, plus $500 million of depository shares.¹ This news was viewed as a positive sign for the bank since it suggested that investors were willing to inject fresh capital into the business. However, later that day, Silvergate, a bank popular with the crypto industry, announced that it was shutting down operations. This news was a harbinger of what was to come for SVB.

On March 9, when markets opened, SVB's stock fell 30%. The bank’s stock eventually fell by 60% that day.¹ A growing number of venture capitalists and startups started to pull their money out of the bank, which added to the downward pressure on the stock.

SVB CEO Greg Becker attempted to appease VCs and startups in a conference video call, asking them to "stay calm." His endeavors were to no avail. By sundown on March 9, SVB customers had initiated $42 billion in withdrawals, creating the largest bank run in history.¹

SVB’s large deposit outflows effectively killed the bank’s share offering. With the bank’s financial situation quickly deteriorating the institution became insolvent, forcing the Federal Reserve to step in and seize it.

Following federal intervention on March 8, Silicon Valley Bank (SVB) was closed down by California’s financial regulator on March 10.¹

The fall of SVB sent shockwaves through the financial world, causing investors and analysts to scramble as they searched for signs of other banks facing similar challenges. The ripple effect was immediate, with other institutions feeling the pressure of SVB's collapse. With the potential of a domino effect, the industry was on high alert for any signs of instability. It didn’t take long for a ripple effect to manifest.

Regional lender First Republic Bank saw its shares fall as much as 52% during early trading, and it continued to drop afterward.² Just two days after SVB’s failure, New York-based Signature Bank was also shut down by regulators, initiating the third-largest bank failure in U.S. history, right behind SVB.

Things were going well for Silicon Valley Bank just a few short years ago. During the 2020 pandemic, SVB’s clients deposited billions bringing the bank from $60 billion in total deposits at the end of the first quarter of 2020 to nearly $200 billion two years later.²

As the money flowed into SVB, the company invested in traditionally safe financial products like U.S. Treasuries and mortgage-backed securities. As a result, when the Federal Reserve saw signs of inflation and raised interest rates, SVB faced challenges. The investments they had made previously lost some of their value, creating a complex financial puzzle to solve.

The higher interest rates set by the Federal Reserve as the pandemic slowed also took a toll on SVB’s clients; startup funding began to dry up as private fundraising became more costly. SVB’s clients withdrew funds. Eventually, the surge in withdrawals led to the bank selling assets (including bonds that had lost value due to interest rate increases) and creating $1.8 billion in losses.²

The collapse of both SVB and cryptocurrency bank Silvergate on March 15, 2023, has sparked fears of contagion and drew uncomfortable comparisons to the Great Recession.

While some industry experts worry the convergence of financial systems might lead to widespread instability, analysts are urging caution pointing to the fact that these banks primarily work with cryptocurrency, startups, and venture capital—all of which are more sensitive to shifts in interest rates. Furthermore, many of today’s banks serve a wide range of customers, which could help insulate them from market volatility.

Bolstering analysts’ positive outlook, shares of some of the nation’s largest banks, including JPMorgan, Wells Fargo, and Citigroup, were up.²

In the wake of SVB’s collapse, President Joe Biden assured Americans the banking system was safe and their deposits were safe. He also stated that the government would not pursue a taxpayer-funded bailout, distinguishing his administration’s actions from the 2008 financial crisis bailout. As another measure to calm the quell, The Federal Reserve announced an emergency lending program to ensure banks could meet the needs of their depositors and eliminate an institution's need to quickly sell their securities in times of stress.

On March 12, US authorities announced they would fully protect every depositor at SVB and Signature Bank.

SVB’s collapse has massive implications for Silicon Valley. Here’s why.

Owing to its reputation for understanding the unique needs of the industry and providing financing to companies that traditional banks often overlook, SVB had become the go-to bank for tech startups and venture capitalists.

SVB held millions of dollars of deposits from a range of high-profile companies, including Rocket Lab, Roku, and a Canadian ad-tech firm, AcuityAds Holdings Inc., which had over 90% of their cash in the bank.³ The ripple effects of the bank's downfall have been felt far and wide, stretching beyond the vineyards of Napa Valley to the bustling financial hubs of London and Singapore.³

Despite the panic, a group of venture capitalists and entrepreneurs used social media to support the bank. Y Combinator, a startup accelerator investing in a wide range of startups, circulated a petition asking for a bailout of SVB customers. Over 100 investment firms also endorsed a statement supporting the bank. Other regional banks, such as San Francisco's First Republic Bank, have also attempted to quell the concerns.

The failure of SVB has raised concerns about the stability of the tech industry as a whole. Many tech startups and venture capital firms are now questioning whether their banking relationships are secure and whether they can continue to rely on banks to fund their growth.

The collapse of SVB could have serious implications for Silicon Valley and tech entrepreneurs. Startups rely on banks like SVB for financing. Without access to capital, these companies could struggle to survive. Additionally, the collapse of SVB could make it more difficult for new startups to raise money if other banks become more cautious about lending to tech companies.

The possible downfall of SVB could result in a worrisome halt in the tech industry's development and expansion. Venture capital firms that hitched their wagon to SVB might now be forced to relinquish those investments, constraining their capacity to support budding startups. The potential outcome? A much more challenging landscape for young companies hoping to secure funding, ultimately curbing the emergence of fresh ideas and innovative, entrepreneurial spirit.

While SVB was a significant player in the industry, it was not the only bank providing financing to tech startups and venture capital firms. Other banks may now step in to fill the void left by SVB, and the industry may adjust to the new reality of tighter credit conditions.

The tech industry could see an exciting shift in financing options as a result of the collapse of SVB. Startups may have access to a wider range of options for funding, decreasing their reliance on a single bank. This could lead to increased financial discipline as startups focus on profitability rather than growth at any cost. It's a hopeful development for a healthier and more stable tech industry in the long run.

Overall, the collapse of SVB is a reminder of the risks associated with entrepreneurship and investing. While the failure of a bank as large as SVB is concerning, historically, the tech industry is resilient and will continue to innovate and grow in the years to come.

With a background in innovative financial instruments and extensive experience in structured financial instruments, fixed-income pricing, and the optimal restructuring of distressed debt, Program Director for Santa Clara University's Online Master's in Finance and Analytics (MSFA) program, Seoyoung Kim, is uniquely qualified to offer her perspective on the SVB collapse.

In the following sections, Kim explains the impact of bank collapses on startups and their day-to-day operations.

She highlights the issue of FDIC insurance, which only covers deposits up to $250,000, and how this can create problems for larger startups with more money on hand. Specifically, banks like Silicon Valley Bank may not be fully covered by FDIC insurance, leaving startups vulnerable if the bank were to collapse.

While the FDIC insures banks in the event of a run on the bank, deposits that are not FDIC-insured pose a risk to startups and other businesses that have large sums of money deposited. Banks like Silicon Valley Bank invest in safe assets, such as US Treasuries and agency residential mortgage-backed securities, which are backed by Fannie and Freddie. However, the investment in long-term US Treasuries poses an interest rate risk, which means that the value of the securities may decrease as interest rates rise, potentially causing losses for those with uninsured deposits.

Startups are feeling pressure as financial institutions like SVB continue to face instability. Many have deposited far more than the FDIC-insured amount of $250,000, leaving them vulnerable if a run on the bank were to occur. This leaves startups with the daunting prospect of potential delays in accessing crucial funds. The uncertainty of the situation can create great anxiety and hinder day-to-day operations, making it increasingly difficult to sustain the success of their business.

Kim explains the price risk associated with these default-free, risk-less securities poses another challenge for banks like Silicon Valley Bank. As interest rates rise, the prices of these securities decrease, resulting in potential losses for the bank if they have to sell them at a lower price to meet the demand for withdrawals. In these situations, the bank faces a tough predicament: selling off securities is necessary to fulfill their obligation to depositors, but doing so at a loss could deepen their financial woes. The bank must tread lightly, with deft strategy and nimble execution, to avoid falling into a pit of ruin. It's a high-stakes game, but one that the bank must play to survive.

For entrepreneurs and co-founders, a delay in accessing funds to make payroll can quickly become a daunting challenge. If employees are not paid on time, their motivation can dwindle and they may become less engaged in their work. This can be especially difficult for those who don't have the same stake in the company as the founders. With all deposits guaranteed by the government, it's important for entrepreneurs to figure out their liquidity backstop and how they can secure immediate-term liquidity when needed.

For smaller banks like SVB, it’s important to note that while they are FDIC insured, they are not considered a Systemically Important Financial Institution (SIFI). Recently, the government has started to raise concerns about the importance of SIFIs in the financial system, Kim shares.

Kim adds that when it comes to banking, size matters. In comparison to banks like Silicon Valley Bank, larger institutions such as Chase and Bank of America are in a league of their own with trillions in deposits. The giants of the banking world were already ahead of the curve when it came to foreseeing potential problems and requiring insurance for accounts exceeding the maximum FDIC coverage. Smaller banks aren’t required to provide the same kind of coverage for their depositors.

Kim elucidates SVB’s collapse brought some of those serious issues to light—more than 80% of their deposits are uninsured, which should have been cause for concern. The anxieties of depositors have been somewhat assuaged by news that the federal government is going to ensure they don't lose out, but unfortunately the same can't be said for investors in the bank. Equity participants are probably going to suffer significant losses.

Kim’s biggest takeaways:

• SVB’s collapse should serve as a reminder to not put all your eggs in one basket.
• Always make sure you have a backup plan in case of a liquidity crunch.
• It's well worth asking your bank how they'd cope in such a situation.

Santa Clara University's prime location in the heart of Silicon Valley enables a profound insight into the collapse of Silicon Valley Bank and its far-reaching effects. The university's well-established ties with the tech industry and other central players in the area allow for a deep understanding of the complex factors that led up to the collapse, and the probable consequences for both local and global economies. Overall, Santa Clara University is well-equipped to provide an informed and insightful perspective on this significant event.

Santa Clara University has ties to Silicon Valley Bank (SVB) as it is one of the main educational institutions that SVB partners with for various initiatives.

For example, the Leavey School of Business at Santa Clara University has a long-standing relationship with SVB. The bank has provided support for various programs at the school, including the Center for Innovation and Entrepreneurship (CIE), which focuses on teaching entrepreneurship skills to students and fostering innovation in the Silicon Valley region. SVB has also sponsored scholarships for students pursuing business degrees at the Leavey School of Business.

In addition, Santa Clara University's location in Silicon Valley makes it a natural partner for SVB as the bank is deeply involved in the startup and technology communities in the region. Many Santa Clara University alumni have gone on to work at SVB or other technology companies in the area.

The partnership between Santa Clara University and SVB helps to foster innovation and entrepreneurship in Silicon Valley by providing students with the skills and resources they need to succeed in the region's fast-paced business environment.

An Online Master's in Finance and Analytics from Santa Clara University can provide students with the necessary skills and knowledge to understand the financial factors that contributed to the Silicon Valley Bank collapse. SCU's Online MSFA program can help with the following:

The program teaches students how to analyze financial data using statistical tools and software, such as R, Python, and Excel. This skill set can help students understand the financial statements and data that led to SVB's collapse.

The program provides students with an understanding of various financial models, such as risk analysis, valuation, and forecasting. This knowledge can help students evaluate the financial risks associated with lending practices and other financial decisions made by banks like SVB.

The program also covers regulatory compliance, which is critical in the banking industry. Students learn about laws and regulations related to banking, such as the Dodd-Frank Act and Basel III, and how these laws can impact the banking industry. This knowledge can help students understand the regulatory environment in which SVB operated and how compliance issues may have contributed to the bank's collapse.

Overall, an Online Master's in Finance and Analytics from SCU can provide students with a comprehensive understanding of financial analysis, modeling, and regulation, which can help them understand the factors that led to SVB's collapse. The program can also equip students with the skills and knowledge necessary to evaluate the risks associated with financial decision-making and develop effective risk management strategies.

If you're looking to pursue an online master's in finance and gain in-depth knowledge of the banking industry, then Santa Clara University Leavey School of Business is the perfect destination for your online education.

Positioned in the heart of Silicon Valley, SCU Leavey offers a distinct advantage in navigating today's analytics-driven finance landscape. SCU's Online MSFA program is ranked #8 in the Best Online MBA Finance programs by U.S. News and World Report.⁴ Moreover, SCU Leavey's business school has earned the top spot for Academic Experience and Career Outcomes by Poets&Quants.⁵

SCU's Online Master of Finance and Analytics program provides a robust academic curriculum with a Silicon Valley focus, enabling you to excel in corporate finance and investment-focused organizations.

If you're looking to enhance your in-demand business skills and create a powerful Silicon Valley network, Santa Clara University's Leavey School of Business Online MS in Finance and Analytics program is an excellent option. Our world-class business faculty can provide a powerful Silicon Valley network and experience to help advance your career. Discover more about how they can serve as crucial building blocks for your success.

For more information, schedule a call with an SCU admissions advisor.