The Collapse Of Silicon Valley Bank

Stefan Kalb was in the middle of a meeting around 1 p.m. on Thursday when a fellow company executive sent him a panicked Slack message: "Do you know what's happening at SVB?"

Kalb, the CEO and co-founder of Seattle-based food management startup Shelf Engine, had been following news of a bank run at Silicon Valley Bank. Droves of depositors were attempting to pull out as much as $42 billion from the bank on Thursday alone, as fear spread that the bank was teetering on the brink of collapse.

The bank seemed to be on firm financial footing on Wednesday. The following day, it appeared to be under water.

For Shelf Engine, a 40-person startup founded in 2015 that uses artificial intelligence to help grocery stores reduce food waste, this was a big problem.

Not only did Silicon Valley Bank help the company process checks and payments, but millions of dollars of the startup's cash was locked up in the bank.

Kalb sprung into action. He and his team quickly opened an account at JPMorgan Chase and attempted to wire transfer every last penny out of Silicon Valley Bank.

"Unfortunately, our wire was not honored and our money is still at Silicon Valley Bank," Kalb, 37, said in an interview on Friday. "We woke up this morning hoping the money would be in that JPMorgan bank account, and it was not."

While he declined to disclose the exact amount that he had deposited at SVB, he noted that Shelf Engine has raised around $60 million from investors since the company was founded. "It was a very large sum of money," he said of the transfer that he attempted to make over the weekend.

That pregnant pause, between hitting send and waiting to see whether the transfer went through, is illustrative of the nail-biting state of limbo that many tech startups found themselves enduring in recent days. Silicon Valley Bank's implosion is the largest American bank failure since the 2008 financial crisis.

The collapse triggered a crisis for tech startups, which have relied on the Santa Clara-based bank for decades. Silicon Valley investors, executives, and lenders immediately began ringing alarm bells about a potential doomsday of mass layoffs and the demise of hundreds of startups.

On Saturday, more than 5,000 startup CEOs and founders pleaded with federal officials for support. Startup execs worried whether they would be able to pay their employees without access to their funds at Silicon Valley Bank.

"We are not asking for a bailout for the bank equity holders or its management; we are asking you to save innovation in the American economy," the founders and CEOs wrote in their petition. "Silicon Valley Bank's failure has a real risk of systemic contagion."

Garry Tan, president and CEO of the startup incubator Y Combinator, sounded particularly alarmed in a conversation with us over the weekend. "If the government doesn't step in, I think a whole generation of startups will be wiped off the planet," he warned, as the specter of bank runs and wholesale collapses haunted his industry.

The Government Steps In

Well, the government did end up stepping in. On Sunday, the Biden administration announced that all of Silicon Valley Bank's customers — whether they were insured or not — will have full access to their deposits. It was a highly unusual move by federal officials to backstop billions of dollars in uninsured money, reflecting widespread fears that the bank's collapse could lead to greater panic.

With one eye in the rear-view mirror, and mindful of the series of events that led to the 2008 financial crisis, federal regulators said Sunday that they were taking those emergency measures to prevent contagion at other small and regional banks.

Silicon Valley Bank was not connected to the rest of the financial system by a complicated network of credit derivatives, in the way that Lehman Brothers and other troubled banks were in 2008. But the prospect of more spooked depositors pulling their money out of their bank because it might be suffering the same kind of stresses as SVB still worried the government. It was a scenario nightmarish enough for the federal authorities to act decisively to try and prevent what they thought could turn into another financial crisis.

The move on Sunday wipes out investors but also protects customers, by effectively waiving the $250,000 ceiling on federal deposit insurance for Silicon Valley Bank. Some observers are calling it a bailout. But the Biden Administration insists it is not. A senior Treasury official on Sunday stressed that Silicon Valley Bank's investors will not be provided with any relief.

"The bank's equity and bondholders are being wiped out. They took a risk as owners of those securities. They will take the losses," the official said. The Federal Reserve also announced on Sunday that it is taking new steps to make funding available to banks to cushion any potential risk prompted by Friday's collapse of Silicon Valley Bank.

In the United Kingdom, meanwhile, the British Treasury and the Bank of England announced early Monday that they had facilitated the sale of Silicon Valley Bank's UK subsidiary to HSBC, Europe's biggest bank, for just one British pound. The move ensured the security of an estimated $8.1 billion of deposits.

The U.S. rescue plan taps the FDIC reserve fund to make all SVB depositors whole, regardless of whether they were technically protected by the program, officials said. They noted the reserve has at least $100 billion in it, and took pains to stress that no taxpayer dollars will be used in this special intervention.

Silicon Valley Bank wasn't the only lender to go bust over the weekend. Signature Bank, a New York-based lender that focuses on the crypto market, was shut down by New York regulators on Sunday. Government officials said all customers of the bank will get their money back, too, regardless of how much they have in their accounts.

Signature's demise follows the failure of another crypto-focused bank, San Diego-based Silvergate, which announced last Wednesday that it had decided to wind down its operations and pay back depositors.

Bank failures are not unheard of, but America hasn't seen any since 2020. And now there's been three in one week, a frequency we haven't seen since the financial crisis back in 2008.

"Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system," federal officials said in the statement on Sunday. "This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth."

Regulators act amid fears of contagion

One reason that Silicon Valley Bank's meltdown was such a shock — and elicited such a stunning response from the government — was because of its speed.

Speaking on MSNBC, former FDIC chief Sheila Bair — who helmed the regulator during the 2008 financial crisis — said bank failures and takeovers usually happen over days and weeks, not hours and minutes.

Welcome to bank runs in the age of social media and digital transactions.

Silicon Valley Bank's stock price plummeted on Thursday, and trading of its shares was halted early on Friday. Hours later, California banking regulators shuttered the bank, and appointed the FDIC as receiver, with control of nearly $175 billion in customer deposits.

In some ways, Silicon Valley Bank was a victim of its own success. During the pandemic, the tech sector's boom led to a surge in deposits at the bank, which then invested a large chunk of the cash into long-term U.S. government securities.

That seemed smart at the time — long-term government debt is generally considered to be about the safest investment you can make. But the value of those securities began to slide after the Federal Reserve started raising interest rates aggressively to fight inflation.

Those rate hikes came just as there was a contraction in funding for startups. Tech companies were spending company cash fast, but struggling to raise money. So they began dipping into their deposits, withdrawing more and more cash from their Silicon Valley Bank accounts.

SVB, like all banks, is required to keep certain amounts of cash on hand. In order to top up its own reserves, the lender was forced to sell some of its investments. But those bonds, safe as they were, were worth a lot less on the open market, because newer bonds had higher interest rates. When the bank sold its bonds, then, it had to take a loss. A huge loss, in fact: a total $1.8 billion.

The announcement of that disastrous bond sale freaked the bank's customers out. They saw the bank losing money, and wondered whether this might crash its stock price and maybe make it fail. An unusually large number of those depositors were companies, not individuals, and most had more than the federally protected $250,000 in their accounts. So they rushed to get their money out.

Alarmed by the sight of a Silicon Valley stalwart in trouble, venture capitalists began running to withdraw their funds from the bank. Peter Thiel's prominent Founders Fund, for example, advised customers to pull deposits out of the bank immediately, adding momentum to a bank run that set off the bank's swift collapse.

An 'existential risk' to innovation and competition in America

Founded over a poker game in 1983, Silicon Valley Bank became the go-to lender for tech startups that appeared too risky in the eyes of larger, more traditional banks. Eventually, Silicon Valley Bank would come to do business with nearly half of all U.S. tech startups backed by venture capitalists.

"If you're a high-growth startup, you can't get a credit card from a normal credit card provider, you can't get a loan from a big bank, but Silicon Valley Bank would give you that," Shelf Engine's Kalb said. "It's these services that startups couldn't get elsewhere."

Silicon Valley Bank did business with well-known tech companies including Shopify, Pinterest, Fitbit and thousands of lesser-known startups, in addition to established venture capital firms, like Andreessen Horowitz.

Roku, the TV streaming provider, was among the companies caught in the middle, to the tune of $487 million, it said in a regulator filing on Friday. "At this time, the company does not know to what extent the company will be able to recover its cash on deposit at SVB," officials at Roku wrote of what amounts to about 26% of the company's cash.

Garry Tan of Y Combinator, which helped launch startups like Airbnb, Reddit and Instacart, said it wasn't the Rokus of the world that could be most threatened by SVB's collapse. Instead, it's the scrappy startups that were already fighting to stay alive amid a challenging fundraising environment that could suffer most going forward, because most other banks might find them too risky to do business with.

Tan says startup leaders were reaching out to him nonstop after Silicon Valley Bank failed. He says they were all expressing fear and dread, worrying about what they believed were inevitable layoffs, or even the end of their companies.

"Founders are texting me now and saying they don't know how to make payroll next week. Will they have to take out personal loans to keep the business running? Do they have to furlough workers?" Tan said, noting those were the services that SVB provided small startups; services that they may not be able to get at other banks going forward. "This can be an existential risk to competition and innovation in the American economy for the next decade."

The Intervention

The government's announcement that the FDIC's Deposit Insurance Fund will be used to make every SVB depositor whole has much of Silicon Valley breathing a sigh of relief. That's because the FDIC usually only insures individual accounts of up to $250,000. That cap has prompted some multimillionaires to spread their money around and open multiple accounts, each maxing out at $250,000. But most people don't do that. And companies rarely do.

Moreover, unlike big bulge-bracket banks like JP Morgan Chase and Bank of America, which have big retail and corporate business lines, SVB had relatively few retail customers. Most customers of the bank were tech startups and firms tied to the venture capital world. And more than 90% of the bank's deposits were above that $250,000 cap.

No wonder there were fears of contagion and panic. But administration officials and financial regulators worked through the weekend to find a way to shore up confidence in the banking sector before business opened on Monday, when depositors might start trying to withdraw all their cash from their banks.

On Monday, President Biden gave a speech, asserting that his administration's quick actions have ensured that "the banking system is safe." He made a point of noting, again and again, that "no losses will be borne by the taxpayers" and that he will work to make sure those responsible for this fiasco will be held accountable.

But who is actually responsible?

Depositors, who failed to insure their cash properly, and then panicked and pulled their money out of Silicon Valley Bank before taking a breath?

The bank's management, for not effectively managing their bond portfolio and churning it as interest rates rose?

The Federal Reserve, for hiking interest rates and devaluing so many banks' investments, or for being too lax in preventing banks from taking on risk?

Federal and state regulators, for not keeping a closer eye on banks' investments and anticipating the effects of a fast-rising interest rate environment on the financial system?

Congress, for watering down the Dodd Frank bill, and allowing banks to have cash cushions that clearly aren't cushiony enough to deal with a sharp downturn?

Donald Trump for signing into law a rollback of certain regulations in Dodd Frank?

Bill Clinton for signing the repeal of the Glass Steagall Act of 1933?

The banking lobby, for pushing for less regulation and lighter capital buffers?

We'd hate to be the ones making that call.

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