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Silicon Valley Bank shutdown: How it happened and what comes next

It told investors it needed to plug a hole caused by the sale of its loss-making bond portfolio. Given banks only keep a portion of their assets as cash, they are susceptible to a rush of demand from customers. The seeds of its demise were sown when it invested heavily in long-dated US government bonds, including those backed by mortgages. The Fed’s rapid interest rate increases over the past year have helped to slow inflation.

  1. The Securities and Exchange Commission is also looking into what happened, according to a Wall Street Journal report on Tuesday.
  2. Federal regulators decided to fully insure and protect all of Silicon Valley Bank’s depositors and their balances for fear of contagion—the impact the bank’s collapse could have on the economy as a whole.
  3. “This has proven that having 50 percent plus of your business in one industry is very dangerous.
  4. There are lots of people who are wondering if their next paycheck will be disrupted.
  5. “The American people and American businesses can have confidence that their bank deposits will be there when they need them,” Joe Biden said in a statement.
  6. On Wednesday evening, SVB announced it was planning to raise $2 billion to “strengthen [its] financial position” after suffering losses amid the broader slowdown in tech sector.

Customers were now aware of the deep financial problems at SVB, and started withdrawing money en masse. All of this is happening just ahead of a Federal Reserve meeting next week, at which the Fed will announce whether it will raise its benchmark interest rate yet again. At Vox, we believe that clarity is power, and that power shouldn’t only be available to those who can afford to pay. Millions rely on Vox’s clear, high-quality journalism to understand the forces shaping today’s world.

Loans to insiders at SVB “more than tripled” to $219 million in the last three months of 2022.

And at Silicon Valley Bank, there was no George Bailey to stop it. On March 11th, Circle said that it “will stand behind USDC and cover any shortfall using corporate resources, involving external capital if necessary.” The stablecoin’s value mostly recovered. We are interested in talking to you about everything happening with the recent spate of tech-related bank closures. By Elizabeth Lopatto, a reporter who writes about tech, money, and human behavior. But it would be too simplistic to say none of the losses will be borne by taxpayers.

President Joe Biden commented on the situation in an attempt to reassure the public, saying the Silicon Valley Bank funds would still “be there when you need them” without requiring a taxpayer-funded bailout. The money being used doesn’t come from taxes, instead, it’s from insurance https://www.day-trading.info/why-sdlc-is-important-to-your-business/ premiums paid by banks, and interest earned on money invested in US government obligations, according to the FDIC. The money for all of this is, for now, coming from the FDIC’s Deposit Insurance Fund, which has said it will protect all depositors to the institution.

What happens next for people who had ties to SVB and Signature Bank?

“It’s really just a fear that has gripped the market, and is sort of self-perpetuating at this point,” he said. And on Sunday, regulators took over Signature Bank, a New York-based institution that expanded into the crypto industry in 2018 and saw $10 billion in withdrawals on Friday after SVB’s troubles began. On Thursday alone, clients raced to collectively withdraw an attempted $42 billion in deposits, and SVB’s share value dropped by more than 60%. I think it might have been possible to staunch the bleeding if Becker had been even halfway good at PR.

But the tech sector as a whole also took a downward turn in recent months, and companies increasingly began to withdraw their deposits from the bank. Now, recall, another bank called Silvergate had just collapsed (for crypto reasons). So when Silicon Valley Bank made this announcement on March 8th, people bolted. Peter Thiel’s Founder’s Fund advised its portfolio companies to pull out, ultimately yanking millions. Union Square Ventures and Coatue Management, among others, decided to tell companies to pull their money, too. It’s got a bunch of assets that are worth less money if interest rates go up.

Do you have questions about the Silicon Valley Bank collapse?

Until shortly after the failure of Silicon Valley Bank, its (now-former) CEO Greg Becker was a director of the Federal Reserve Bank of San Francisco. “It was the speed, fueled by zero distribution costs for both rumors and withdrawals, that was so destabilizing.” On the other side of a screen, startup leaders raced to withdraw funds online — so many, in fact, that some told CNN the online system appeared to go down. Still, the end result was a modern race to withdraw funds, troubleshooting tools in a network engineers arsenal which House Financial Services Chair Patrick McHenry later described in a statement as ” the first Twitter fueled bank run.” Traders cheered the lack of surprises in the February Consumer Price Index inflation reading and looked ahead to Wednesday’s Producer Price Index, which economists say could show a slowing in wholesale prices. Ahead of the Federal Reserve’s policy meeting next week, investors are keeping a close watch for any signs that inflation is cooling.

In the lead-up to the Silicon Valley Bank collapse, the Federal Reserve and other central banks had been increasing interest rates as a way to fight global inflation. But after the failure of SVB, Signature Bank, and Silvergate Capital, the Fed’s next rate increase was lower than expected prior to the bank failures. The Fed also cited the 2018 change in Fed supervisory standards and the impact of social media with a highly networked and concentrated depositor base as contributing factors. Silicon Valley Bank provided business banking services for companies at every stage, but it was particularly well-known for serving startups and venture-backed firms. According to the company’s website, 44% of the venture-backed technology and healthcare initial public offerings (IPOs) in 2022 were clients of Silicon Valley Bank. Mayopoulous replaced former CEO Greg Becker on Monday following the bank’s collapse that triggered widespread concerns about how the tumult could spread to other regional banks.

That funding, the announcement said, will come from loans from the newly created Bank Term Funding Program. Part of SVB’s specific problem is that it was so concentrated in its business. SVB catered to venture capital and private equity — as that sector has done well over the past decade, so has SVB. But because the bank was also very concentrated https://www.topforexnews.org/software-development/java-developer-salary-skills-and-resume/ with high exposure to one industry, that opened it up to risk. When things got bad for its non-diversified group of clients, it very quickly got bad for the bank. Beyond tech, this caused some shakiness across the banking industry, especially regional banks, amid concerns that other banks could be in trouble or that contagion could set in.

(It’s important to note for consumers here that, really, the money you have in the bank right now is almost definitely fine.) It also had ripple effects in Europe. SVB’s blowup is a big deal and a symptom of bigger forces in motion in tech, finance, and the economy. And because of all these liquidity events — congrats, btw — no one needed a loan because they had all this cash. So, as explained in more detail by Bloomberg’s Matt Levine, Silicon Valley Bank bought government securities. This was a fine and steady way for SVB to make money, but it also meant it was vulnerable if interest rates rose.

Among its clients were tech and tech-adjacent companies like Roku, Roblox and Vox Media. (It turns out that this concentration in the tech sector was key to its demise.) But it remained little known outside of tech circles — until this past week. That’s in large part because the tech startup world is tightly plugged into itself, with founders and executives constantly trading information and boasting on Twitter or text chains or Signal chats.

Those bonds, which are backed by the U.S. government, are generally considered to be safe, modest investments. But they pay out in full only when they’re held to maturity; otherwise, long-term bonds risk losing value if interest rates rise. “They really developed a niche that was the envy of the banking space,” said Jared Shaw, a senior analyst at Wells Fargo. “They are able to provide all the products and services any of these sophisticated technology companies, as well as these sophisticated venture capital and private equity funds, would need.”