Svb Finance

Silicon Valley Bank (SVB) was a financial institution deeply intertwined with the technology and venture capital ecosystems. Founded in 1983, it positioned itself as a partner for startups, offering banking services, loans, and strategic financial advice specifically tailored to their unique needs. Its focus allowed SVB to amass significant deposits and establish a dominant market share within the tech industry.

SVB’s business model thrived during periods of low interest rates and abundant venture capital funding. Startups, flush with cash, deposited large sums into their SVB accounts. The bank, in turn, invested these deposits heavily in longer-term U.S. Treasury bonds and mortgage-backed securities. This strategy generated profit as long as interest rates remained stable or declined. However, it also created a vulnerability to interest rate risk.

As the Federal Reserve began aggressively raising interest rates in 2022 to combat inflation, the environment changed dramatically. Rising rates had a multi-faceted impact on SVB. Firstly, the value of its bond portfolio declined significantly, creating unrealized losses. Secondly, startups began drawing down their deposits at a faster rate as venture capital funding became more scarce and operating costs remained. They needed the cash to sustain operations while seeking new funding rounds.

This combination of factors put SVB in a precarious position. To cover the deposit outflows, the bank was forced to sell portions of its bond portfolio at a loss. In March 2023, SVB announced it had sold $21 billion in securities, resulting in a $1.8 billion after-tax loss. It also announced plans to raise $2.25 billion in new capital to shore up its balance sheet. This announcement triggered widespread panic among depositors, particularly venture capitalists and startup founders, who feared the bank’s solvency.

The fear quickly turned into a bank run, with depositors withdrawing billions of dollars within a very short period. The rapid outflow of funds overwhelmed SVB’s ability to meet its obligations, leading to its collapse. On March 10, 2023, the California Department of Financial Protection and Innovation closed SVB and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. This marked the largest bank failure since the 2008 financial crisis.

The failure of SVB had a significant impact on the tech industry, sparking concerns about contagion and the stability of other regional banks. The FDIC stepped in to guarantee all deposits, alleviating some of the immediate panic and preventing a wider financial crisis. However, the collapse of SVB served as a stark reminder of the importance of sound risk management in banking, particularly in specialized sectors like technology finance. The event also highlighted the interconnectedness of the financial system and the potential for rapid contagion in the digital age.