In a truly stunning collapse, the likes of which haven’t been seen since the Great Recession, Silicon Valley Bank (SVB) is dead and gone.
Catch-up: SVB, the bank of choice for US tech startups, put the fear of God in its customers on Thursday after losing US$1.8 billion in a securities sale and going on to announce new plans to raise capital, which managed to cast serious doubt on the lender’s financial stability.
- This triggered a good ol’ fashioned bank run in which clients, worried about SVB’s ability to give their deposits back, said: “Hey! Give me my money back! Now!”
- Things got worse after major VCs told their portfolio companies to get out of SVB. Shares fell ~60% on Thursday and another ~65% on Friday before being halted.
What happened: Faster than you could say, “potential fire sale,” SVB was no more. California regulators seized the bank yesterday afternoon and put it under Federal Deposit Insurance Corporation (FDIC) receivership, which will handle its remaining assets.
Why it happened: By primarily serving tech startups, SVB was particularly vulnerable to the new high interest rate environment. As the tech sector slumps, SVB’s customers have been drawing down their deposits to keep the lights on, creating a cash crunch for the bank.
- SBV tried to refill its coffers by dumping some assets, but the value of those had also fallen because of higher rates, forcing them to sell at a loss.
Why it matters: SVB was the banking partner for almost half of all listed US venture-backed tech and healthcare companies last year. Its failure will wreak havoc on an already uncertain industry and could result in layoffs and wipeouts of whole companies—even in Canada.
- Insured depositors will have access to their money by Monday, but the FDIC only covers up to $250,000. Over that, how much can be recovered is TBD. That’s really bad, because ~93% of the bank’s ~US$161 billion in deposits were uninsured.
Bottom line: It’s impossible to fully capture how tied SVB was to the modern tech world (though this Twitter thread gives it a good try), but stay tuned to see how it shakes out.—QH