Silicon Valley Bank (SVB) was a well-capitalized institution until panic within the venture capital community caused its downfall. Regulators seized SVB’s deposits on Friday, marking the largest US banking failure since the 2008 financial crisis and the second-largest ever. The VC community is now grappling with how to deal with their role in the bank’s demise. The failure of SVB was due to dislocations spurred by higher rates. Start-up clients withdrew deposits to keep their companies afloat in a chilly environment for IPOs and private fundraising, leaving SVB short on capital. When it announced news that it needed to raise $2.25 billion to shore up its balance sheet, a wave of deposit withdrawals occurred, and the company was forced to sell all of its available-for-sale bonds at a $1.8 billion loss. Despite assurances from CEO Greg Becker to “stay calm”, deposit withdrawals reached $42 billion by the end of Thursday. By close of business that day, SVB had a negative cash balance of $958 million, failed to scrounge enough collateral from other sources, and could not pay its obligations as they come due, leading to its insolvency.
Key takeaways:
- Venture capital-driven panic was the root of SVB’s collapse
- The VC community voiced concerns over a bank run at SVB, leading to the withdrawal of $42 billion of deposits by Thursday
- CEO Greg Becker could not guarantee that the capital raise would be the bank’s last, which further contributed to the panic
- Insured deposits are expected to be available by Monday, but the majority of deposits held by SVB are uninsured, leaving many customers unsure of when they will be freed up
- The failure of SVB could have far-reaching consequences for start-ups’ abilities to pay employees and VC’s abilities to raise funds.
