Silicon Valley Bank Collapse: Why It Happened?
Silicon Valley Bank collapsed on Friday, March 10th 2023 and was the 2nd largest bank failure in United States History. It was also the largest bank collapse since 2008 and could send a massive tidal wave effect through regional banks and the entire global banking system.
Here’s a quick rundown of what took place and how investors can protect themselves.
What was Silicon Valley Bank?
Silicon Valley Bank (SVB) was a commercial bank that provides financial services to the technology and innovation sector. It was founded in 1983 and is headquartered in Santa Clara, California, USA. SVB offers a range of banking services, including commercial lending, cash management, foreign exchange, and investment management.
It has a unique business model that focuses on lending to startups and venture capital firms, and it has established a strong market position in the tech industry. SVB has also expanded its services globally and has operations in the United Kingdom, Israel, China, and other countries.
It is recognized as one of the leading banks for tech startups and has played a significant role in the growth of the tech industry.
Why Did SVB Collapse?
Silicon Valley Bank collapsed due to a massive bank run on March 10th, 2023 when thousands of customers and venture capitalists firmed were urged to withdrawal their funds.
SVB bank didn’t have enough funds to cover the deposits and the FDIC took over the bank.
How Did It Happened?
The problem with Silicon Valley Bank started back during 2021 during a massive stock market boom that saw regional banks such as SVB soar in market value. Customer deposits soared and SIVB stock traded almost as high as $800 during its peak.
In order to boost revenue, Silicon Valley Bank took its customer deposits and invested them into low yielding bonds to generate revenue. At the time, it seemed like a good idea to earn revenue on customer deposits because loan demand was extremely low.
However, the Fed Reserve began raising interest rates in 2022 and made the value of SVB’s bonds much lower because they were locked into a lower rate.
On March 9th, 2023 Silicon Valley Bank surprised investors by selling over $2 billion in bonds to shore up its balance sheet. SVB suffered massive losses because the value of those assets had declined at lost since SVB purchased them during the low interest rate period.
The increase in interest rates over the last 1.5 years led to a decrease in the market value of SVBs bond holdings. This means even if SVB sold all its bonds, it wouldn’t be able to satisfy the withdrawal requests.
This action created mass panic through Silicon Valley because many clients and startups held millions of dollars at SVB.
The FDIC only insures deposits up to $250,000 per single account so many depositors were uninsured for the bulk of their assets.
According to S&P Global Market Intelligence, Over 97% of clients at SVB held over $250,000 in cash in their accounts.
This could lead to ripple effects across various industries. Companies holding more than $250,000 with SVB won’t be able to access their cash until a future date. It could lead to liquidations of business assets to pay creditors, bankruptcies, and job losses.
On March 10th, $42 billion in deposits left the bank and led to a bank collapse. SVB was taken over by FDIC in the second largest bank failure in American financial history.
Silicon Valley Bank Stock Investors Lost Billions
Once the bank run began, SIVB stock began crashing on Wall Street and fell nearly 60% until the SEC halted the stock on March 10th.
Nearly $20 billion in SIVB market cap was wiped out in just 2 days due to Silicon Valley Bank’s closure.
The ugly truth is that SIVB insiders may have knew the worst was coming because Silicon Valley Bank CEO Gregory Becker sold nearly $4 million dollars worth of SIVB stock just weeks prior.
Other key executives including the CTO and CFO sold SIVB stock as well. With all of the trouble surrounding Silicon Valley Bank, I believe the SEC should seriously investigate Gregory Becker and his associates for insider trading fraud.
Tech Companies Exposed to SVB
A big problem: SVB holds cash deposits of large tech companies. For example, Roku holds 26% of its cash with SVB. This cash may not be accessible for a long time, meaning if Roku has short-term liabilities of its own, it may not be able to cover them.
This could lead to ripple effects across various industries. Companies holding more than $250,000 with SVB won’t be able to access their cash until a future date. It could lead to liquidations of business assets to pay creditors, bankruptcies, and job losses.
Will Contagion Happen to Other Banks?
Other regional bank stocks crashed after the SVB failure news until the SEC halted them and caused a reversal trend to form. Here’s a list of bank stocks that could be affected by Silicon Valley Bank’s closure:
- First Republic Bank (FRC)
- Signature Bank (SIBY)
- Western Alliance (WAL)
Lessons Learned
It’s important to learn several lessons from the Silicon Valley Bank collapse. Here are some key takeaways from this whole mess:
- Never Put All Your Eggs in One Basket: SVB customers may lose access to millions of dollars in funds due to having all of their money in 1 single account. Don’t put all of your money in one single place and use several different accounts to reduce risk.
- Keep Your Savings Under $250,000 in Any Single Account: The FDIC only insures any account up to $250,000 so try to keep your balance below that threshold. You can open up many accounts at different banks to achieve this.
- Diversify Your Cash by Holding Bitcoin: Bitcoin was created during the 2008 financial collapse to avoid this exact scenario. Buying BTC is a smart way to diversify cash outside of the central banking system.
How to Protect Yourself in Times of Uncertainty
PAIN IS COMING. This bank failure could lead to bankruptcies when companies with all their cash at SVB can’t pay their debts. Layoffs will follow, and nobody knows how bad the impact will be.
People may have to sell assets to pay for day to day expenses, so assets prices will drop. Risky assets are the first to drop (bitcoin, growth stocks, short term rental properties). Less risky assets (long term real estate, value stocks) are the slowest to get impacted.
With everything happening all at once (high inflation, increased rates, defaults, potential mortgage issues) the best thing you can do right now is protect your income.
Your goal right now is to protect yourself. This is where your emergency fund will come in handy. Having cash set aside can help you avoid bankruptcy and homelessness.
