The Fall of Silicon Valley Bank: How and why it happened!

Silicon Valley Bank's (SVB) collapse on March 10 has impacted the U.S. banking sector and the startup ecosystem. Due to its prominent role as a lender for the startup sector, there is a lot of speculation and uncertainty over the causes of its failure. Furthermore, the failure of SVB has resulted in the closure of another bank, causing regulatory officials to take swift action to prevent further disruptions to the U.S. banking system. The impact of SVB's collapse has been far-reaching and continues to be a topic of concern for those involved in the industry. The fall of Silicon Valley Bank (SVB) made headlines as the largest failure of a US-based financial institution since the 2008 financial crisis when Washington Mutual collapsed. The impact of SVB's downfall has been significant and has raised questions about the banking industry's stability. In this article, we will explore the reasons behind Silicon Valley Bank's downfall, its implications, and how it could have been prevented.

Who is Silicon Valley Bank (SVB)?

Silicon Valley Bank, located in San Jose, California, was founded in 1983 by former Bank of America (BAC) executives William Biggerstaff and Robert Medearis. The company was created to cater to the needs of tech firms when the computer market was still in its early stages of development. The bank's name reflected its focus on serving the needs of the tech industry.

How and Why it Happened - A Timeline of the Crash

Silicon Valley Bank (SVB) was the 16th-largest bank in the United States in 2022, with around $209 billion in assets. The recent occurrences at SVB were entirely unusual for a company with such a renowned standing in the financial industry. The bank's initial challenge was dealing with variable interest rates. Some SVB clients began withdrawing their assets as rising interest rates drove the market for many firms' initial public offerings to close. It also raised the price of private funding. The following is a timeline of important events connected to the bank's collapse and aftermath.

March 8

Following a bank run that compelled the California lender to sell some of its debt securities, Silvergate Capital, a bank that focuses on cryptocurrencies, declared it would close its doors and liquidate its assets.
In order to offset rising withdrawals, Silicon Valley Bank announced it would report a $1.8 billion loss after selling some of its investments. The bank claims that client cash burn has continued to be high and worsened in February, resulting in lower deposits at the month's end than anticipated. It claims that selling a combination of common and preferred stock will raise $2.25 billion.
Moody's, a credit ratings company, cut the bank's bond rating and reduced its assessment from stable to negative.

March 9

When the market opens, the stock of SVB Financial plummets. Shares of the four largest U.S. banks are falling on fears that smaller banks would be compelled to accept losses to raise capital. JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup have all lost $52 billion in market value due to the downturn.
The panic concerning Silicon Valley Bank's stability spreads via texts and social media, leading venture-capital firms to withdraw their investments from the bank and advise their portfolio companies to do likewise. When Silicon Valley Bank eventually closed for the day, depositors attempted to withdraw a staggering $42 billion.

March 10

Following a premarket selloff on Friday morning, trading of SVB shares is halted. Shortly after that, federal regulators declared their takeover of the bank before it could open, marking the second-largest bank failure in the history of the United States, second only to the collapse of Washington Mutual during the peak of the 2008 financial crisis.
The FDIC has announced that insured deposits of customers will be accessible on Monday. Still, it must provide information on the timeline for uninsured depositors to receive funds.

March 11

During the weekend, tech startups seek funding sources for payroll and daily operations. Their deposits are inaccessible due to the bank's failure in which they were held.

March 12

Amid growing concerns about potential bank runs at other financial institutions, federal regulators reveal emergency measures on Sunday to prevent further repercussions from the failure of Silicon Valley Bank.
They disclose that they have taken control of Signature Bank, the second bank to be affected, now the third-largest bank failure in U.S. history. The regulators assure customers of both banks that they will receive full reimbursement for their deposits and introduce a new lending initiative for banks.

March 13

In a public address, President Biden reassured the public that the U.S. banking system was secure and emphasized that taxpayers would not bear the burden of any potential bailouts. Nonetheless, regional bank stocks experienced a significant decline, with First Republic being hit the hardest, dropping by 60 percent.

March 14

Bank stocks regained a portion of their earlier losses.
According to reports, the Justice Department and the Securities and Exchange Commission initiated investigations into the downfall of Silicon Valley Bank.

March 15

Credit Suisse's shares plummeted to a historic low, dropping by 24 percent. The Swiss National Bank, which serves as Switzerland's central bank, announced that it would extend financial assistance to Credit Suisse if required.
At the end of the trading session, the S&P index on Wall Street experienced a 0.6 percent decline, undoing some of the gains from the previous day's upswing as investors became anxious again about the banking sector's stability.

How Businesses can avoid a Similar Crash to Silicon Valley Bank

Here are three actionable tips for businesses to prevent a similar crash to Silicon Valley Bank.

Diversify your portfolio and manage risk carefully

One of the significant factors that led to the downfall of Silicon Valley Bank was its exposure to a single industry: the tech sector. This made the bank vulnerable to changes in the market, notably when interest rates rose, causing many tech firms to withdraw their assets. Businesses should learn from this and diversify their portfolio, so they're relying on something other than one industry or investment. Additionally, they should manage risk carefully and consider the potential impact of market changes on their assets.

Maintain constant communication

Social media rumors and panic that resulted in $42 billion worth of withdrawal attempts in one day from depositors contributed to Silicon Valley Bank's collapse. To avoid a similar circumstance, businesses should maintain open communication with stakeholders, including investors and customers. This will promote trust and help avoid unwarranted panic, which can harm a company's brand and financial stability.

Assess and address any vulnerabilities regularly

Many people were surprised by Silicon Valley Bank's collapse, yet there were signs beforehand. The bank had already sold some of its debt securities to offset withdrawals because of problems with changing interest rates. Businesses should frequently evaluate their operations and finances to spot any possible weaknesses and fix them before they turn into significant problems. Find blind spots; this may entail doing frequent audits, stress-testing financial models, and consulting other experts. Businesses can reduce the likelihood of a similar collapse by adopting a proactive risk management strategy.

Final thoughts

The fall of Silicon Valley Bank had a tremendous impact on the startup ecosystem and the U.S. banking industry. The origins and effects of one of the worst bank failures in the United States since the 2008 financial crisis has prompted questions about the safety of the banking sector. The bank's struggles managing changing interest rates and client asset withdrawals finally caused it to fail, forcing the closure of another bank and requiring regulatory officials to move quickly to stop further disturbances to the financial system. To prevent repeated collapses, businesses should be aware of the dangers connected with their financial institutions, such as inadequate capital, inadequate risk management, and poor governance. It is essential to regularly evaluate the institutions they operate with financial standing and diversify their investment portfolios. Also, businesses should have procedures for a bank failure or financial crisis. Overall, the failure of Silicon Valley Bank serves as a reminder of the significance of good risk management and financial planning to avoid major financial system disruptions.