The distress collapse of the Sillicon Valley Bank
Image Source: The Hindu Business Line
On Wednesday, Silicon Valley Bank was a company with a lot of money that intended to make even more.
The bank’s 40-year run was cut short in 48 hours due to a panic in the venture capital industry, which SVB had served and helped build.
The government closed the Sillicon Valley Bank and took all of its assets on Friday. This is the second-largest bank failure in the United States’ history, and the greatest after the 2008 financial crisis. Things started to go wrong after the company warned investors late Wednesday that it required $2.25 billion to restore its financial sheet. Following that, a well-known bank that had developed alongside its tech clientele went out of business in a flash.
Even though the second bank closing announced this week is starting to settle down, venture capitalists are still upset about other investors’ role in SVB’s failure.
An investor at Restive Ventures named Ryan Falvey told CNBC, “This was a bank run because VCs were afraid.” “This is one of the best examples of a business doing something that hurts itself in the long run.”
The event is the latest result of the Federal Reserve’s efforts to stop inflation by raising interest rates in the most aggressive way it has in the last 40 years. So, there are worries that startups might not be able to pay their employees in the next few days, that venture investors might need help getting money, and that a troubled sector could worsen.
When rates went up, the market changed, which caused the Sillicon Valley Bank to fail. SVB ran out of money because startup clients took out deposits to keep their businesses going during a hard time for initial public offerings (IPOs) and private fundraising. Because of this, the bank announced late Wednesday that it had to sell all of its available bonds at a loss of $1.8 billion.
When the Silvergate bank, which focused on cryptocurrencies, failed, more money was suddenly needed. On Thursday, this caused another wave of deposit withdrawals when venture capitalists told the companies they owned to move their money. People are worried that startups might be unable to use their deposits if there is a run on the Sillicon Valley Bank.
During a call that began Thursday afternoon, SVB customers said that CEO Greg Becker’s advice to “stay calm” didn’t make them feel better. The stock kept going down until it was down 60% at the end of regular trading. Someone on the call said that Becker couldn’t promise that this was the last time the bank would need to raise money.
In California, customers withdrew a huge $42 billion deposit by Thursday, according to a regulatory filing.
The filing says that at the end of that day’s business, the Sillicon Valley Bank had a cash balance that was $958 million in the red. As a result, the bank needed help finding enough collateral from other places, the regulator said.
Falvey, a former Sillicon Valley Bank employee who started his fund in 2018, said that the fact that the tech investing community is so tight-knit was a big reason why the bank went out of business so quickly.
In the past few days, significant funds like Union Square Ventures and Coatue Management sent emails to all of their startups telling them to take their money out of the Sillicon Valley Bank because they were worried about a bank run. He said that social media made problems even worse.
Spencer Greene is a venture capitalist and a partner at TSVC. He said investors were bad if they were “wrong on the facts” about SVB’s position.
“Business as usual” at the Sillicon Valley Bank
Thursday night, some Sillicon Valley Bank customers got emails telling them everything at the bank was “business as usual.”
David Faber of CNBC said that on Friday, as the Sillicon Valley Bank shares continued to fall, the bank stopped trying to sell them. He said that he was instead looking for someone to buy it. But the loss of deposits made it harder to sell, and Faber said that effort also failed.
Read Also: Silvergate caught in crypto mass withdrawal
Falvey began his career at Wells Fargo. During the financial crisis, he worked as a consultant for a bank that was taken over. He said the mid-quarter update from SVB on Wednesday gave him confidence. He said the bank had enough money to give everyone their money back. As rumors spread, he told the companies he worked with to keep their money at SVB.
People who kept their money at the Sillicon Valley Bank after the bank run that led to its seizure are still trying to figure out when they’ll get it back. Even though insured deposits could be available as early as Monday, most of them held by SVB were not insured, and it is still being determined when they will be released.