Silicon Valley is reeling from the aftereffects of one of its biggest disasters. In the last 48 hours, regulators shut down Silicon Valley Bank, the most important bank in the tech industry. It’s the second-biggest bank failure in US history, after Washington Mutual in 2008.
Bank stocks around the world plunged on Monday even as President Joe Biden vowed to ensure the safety of the U.S. banking system.
How did this happen? As per a report by CNN, during the period of near-zero interest rates, SVB invested billions of dollars on US government bonds. What appeared to be a safe investment quickly unravelled as the Federal Reserve aggressively raised interest rates to combat inflation. The collapse on Friday came after a huge run on deposits left it unable to stay afloat on its own. A bank run occurs when depositors try to pull out all their money at once and sometimes the actual cash isn’t immediately there because the bank used it for other things. And just like that, the tech valley was in shambles.
Unlike what many believe, geniuses aren’t the only fuel behind start-ups, they need the money more than anything. The California-based bank provided that fuel, working closely with many venture capital-backed startups. It claimed to be the “financial partner of the innovation economy” and the “go-to bank for investors.”. More than 2,500 VC firms banked there, as did a lot of tech execs. Major companies across the world like Roblox, Buzzfeed and more had their deposits with the bank.
Founded in 1983 after a poker game, Silicon Valley Bank was crucial for the tech industry’s success. It was the 16th largest bank in the US before its collapse.
The Federal Deposit Insurance Corporation (FDIC) insures most U.S banks, but only up to $250,000. But companies have burn rates of millions of dollars a month. The FDIC says it’s “undetermined” how many deposits were uninsured when the bank closed. This disruption to cash flow could have disastrous effects on companies and most importantly, individual employees. Companies aren’t sure they’ll be able to pay their employees on time. A payroll service company called Rippling had to tell its customers that some paychecks weren’t coming on time because of the SVB collapse. Some investors are loaning their companies money to make payroll. Of course, one other problem is that a lot of investors were also banking at SVB. And payroll is only one of their problems, there are still other expenses to be covered.
SVB’s failure isn’t directly connected with the ongoing crypto meltdown, but experts say it could potentially make it worse. Earlier this week, 2 major crypto-friendly banks, Silvergate and Signature, seized operations. After the shutdowns, the crypto market plunged deep into the red. Bitcoin fell below $20,000, and the total crypto market cap touched $914 billion. Over the weekend, crypto firm Circle announced that it had $3.3 billion worth of reserves at SVB. Although the prices rebound quickly as regulators stepped in, this crisis shows just how fickle crypto money is.
President Joe Biden commented on the situation in an attempt to reassure the public, saying the Silicon Valley Bank funds would still “be there when you need them” without requiring a taxpayer-funded bailout.
In response to the collapse, the FDIC created a new entity, the Deposit Insurance National Bank of Santa Clara, for all insured deposits for Silicon Valley Bank. People with uninsured deposits will receive an advanced dividend and get a little certificate, but that isn’t a guarantee people will get all their money back. And even if they do, most companies might not survive until then.
