Understanding the Collapse of Silicon Valley Bank and Its Aftermath

Silicon Valley Bank's collapse was a shock to the financial world, leaving many wondering what went wrong. The bank's rapid expansion and aggressive lending practices created a fragile foundation that ultimately led to its downfall.

The bank's assets grew from $6.5 billion in 2019 to over $200 billion in 2022, fueled by a surge in tech company deposits. This rapid growth put a strain on the bank's balance sheet.

The bank's collapse was triggered by a classic case of a bank run, where depositors rushed to withdraw their funds. This led to a liquidity crisis, as the bank struggled to meet the sudden demand for cash.

The bank's failure was exacerbated by its heavy reliance on tech company deposits, which were largely uninsured. This meant that when the tech companies' valuations plummeted, the bank was left with a significant amount of worthless deposits.

Silicon Valley Bank's bonds became riskier investments as the Federal Reserve increased interest rates in response to high inflation.

As a result, the bank's bonds declined in value, and investors could buy them at higher interest rates, leading to a $1.8 billion loss for the bank.

SVB lost $1.8 billion, marking the beginning of the end for the bank, as it tried to accommodate large withdrawals from its customers.

The bank's senior management team mismanaged the investment risk of their balance sheet, and the board of directors failed to perform its duty as a check on senior management.

The Federal Reserve formally attributed blame for the bank's failure to the senior management team and the board of directors for their mismanagement and lack of oversight.

The 2018 change in Fed supervisory standards, which increased the asset threshold for additional oversight from $50 billion to $250 billion, also contributed to the bank's collapse.

Despite being the 16th largest bank in the country, Silicon Valley Bank didn't have enough assets to be subject to the extra rules and oversight that would have been in place if the threshold had not been changed.

The collapse of Silicon Valley Bank had a significant impact on depositors and investors. The FDIC insures bank deposits of up to $250,000 per depositor per bank for each account category, but most accounts held more than $250,000 of deposits, leaving account holders with potential losses.

The FDIC's insurance limit of $250,000 per depositor per bank meant that account holders with uninsured funds above this threshold risked losing some of their money. This is unfortunate, but fortunately, the Federal Reserve stepped in to invoke a systemic risk exception, ensuring that all depositors would be made whole, even for those funds that were uninsured.

Investors, on the other hand, were not so lucky. The FDIC can protect depositors from losses, but it can't do the same for shareholders and unsecured debt holders. This means that individuals and institutions that owned stock in SVB Financial Group may not get their money back.

The collapse of Silicon Valley Bank created hardships among some tech startups and companies holding significant uninsured deposits and low cash flow faced significant risks. Experts initially didn't expect SVB's collapse to pose a systemic risk to the U.S. financial system, but it's clear now that it did have some effects.

The bank's failure was the largest since the financial crisis of 2008, and it further shook consumer confidence in the economy. The lack of oversight for banks with less than $250 billion in assets is a weakness within the banking system that needs attention.

The government's response to the collapse of Silicon Valley Bank was swift, with many lawmakers calling for immediate action to protect depositors. A group of 599 venture capitalists, including Garry Tan and David O. Sacks, urged government intervention.

Representatives Ruben Gallego and Eric Swalwell requested that depositors be made whole, while Representatives Ro Khanna and Brad Sherman asked the Treasury Department and FDIC to confirm that depositors would be protected so they could make payroll.

The FDIC's announcement that it would protect depositors without affecting taxpayers via the Bank Term Funding Program was met with relief from Governor Newsom, Senator Kyrsten Sinema, and Representative Anna Eshoo.

A group of 599 venture capitalists, including Garry Tan and David O. Sacks, called for a government intervention to protect uninsured depositors.

Representatives Ruben Gallego of Arizona and Eric Swalwell of California wanted depositors to be made whole, while Representatives Ro Khanna and Brad Sherman of California asked the Treasury Department and FDIC to confirm that depositors would be protected.

Representative Matt Gaetz of Florida and Republican presidential candidates Nikki Haley and Vivek Ramaswamy opposed any taxpayer-funded bailout of the bank, with Ramaswamy suggesting the FDIC's deposit insurance limit be raised instead.

San Jose Mayor Matt Mahan called the $250,000 limit "arcane" and criticized the federal government's response to the bank's failure as slow and indicative of its misunderstanding of Silicon Valley startups' contribution to the national economy.

Governor Newsom, Senator Kyrsten Sinema of Arizona, and Representative Anna Eshoo of California applauded the FDIC's announcement that it would protect depositors without affecting taxpayers via the Bank Term Funding Program.

Senator J. D. Vance of Ohio questioned whether the federal government would have taken similar action for a smaller bank or credit union, highlighting the potential for moral hazard.

Economist Dean Baker contrasted the broad agreement behind rescuing relatively sophisticated Silicon Valley business proprietors with the objections over moral hazard and personal responsibility to President Biden's student loan forgiveness program.

San Jose Chamber of Commerce CEO Derrick Seaver argued that any moral hazard was worth staving off the potential risk of allowing depositors to go unprotected.

The government's rescue plan for SVB's depositors has left many wondering who footed the bill. The FDIC covered the losses, estimated to be around $20 billion, using premiums from insured banks.

The FDIC's Deposit Insurance Fund is the agency responsible for insuring bank deposits, and it's funded by quarterly premiums from all insured banks. This means that banks will have to pay more for deposit insurance, which could lead to higher interest rates on loans or lower interest rates on savings accounts.

The FDIC's plan to cover the losses won't directly charge taxpayers, but some losses could trickle down to them indirectly. For example, if your bank passes on the increased cost of deposit insurance to you, you might see a higher interest rate on a loan or a lower interest rate on your savings account.

In a receivership, a court-appointed official takes control of a company's assets and finances to pay off creditors. This process is often used when a company is unable to pay its debts.

The receiver has the power to manage the company's operations, sell off assets, and distribute the proceeds to creditors. The goal is to maximize the return for creditors, not to save the company.

A receivership can be voluntary, where the company agrees to the process, or involuntary, where the court orders it. In either case, the receiver takes over the company's management.

The receiver's powers can vary depending on the jurisdiction and the specific circumstances of the receivership.

Silicon Valley Bank was founded in 1983 by Bill Biggerstaff, Robert Medearis, and Roger Smith. It was a subsidiary of SVB Financial Group, a publicly-traded company (SIVB).

SVB Financial Group was primarily owned by institutional investors, including The Vanguard Group, Inc., SSgA Funds Management, Inc., BlackRock Fund Advisors, Alecta Pension Insurance Mutual, and JPMorgan Investment Management, Inc.

The largest shareholders of SVB Financial Group included The Vanguard Group, BlackRock, and State Street Corporation, which owned the stock in large exchange traded funds that track the performance of S&P 500. The South Korean National Pension Service owned 100,000 shares in SVB's holding company, SVB Financial Group.

Here's a list of the main investors in Silicon Valley Bank:

Silicon Valley Bank's main investors were primarily institutional investors, with the largest shareholders including The Vanguard Group, Inc., SSgA Funds Management, Inc., BlackRock Fund Advisors, Alecta Pension Insurance Mutual, and JPMorgan Investment Management, Inc.

These institutional investors likely had significant stakes in the bank's success, but their ownership was not without risk.

The Vanguard Group, Inc. held a substantial portion of Silicon Valley Bank's shares, as did BlackRock Fund Advisors and SSgA Funds Management, Inc.

Alecta Pension Insurance Mutual and JPMorgan Investment Management, Inc. also had a notable presence among the bank's largest shareholders.

Here's a list of Silicon Valley Bank's main investors:

HSBC UK agreed to acquire Silicon Valley Bank UK for £1, with no cost to taxpayers and depositors fully protected. This move was announced on March 13, 2023.

The FDIC played a key role in the acquisition process, announcing on March 26, 2023, that First Citizens BancShares would acquire the commercial banking business of SVB. First Citizens bought around $119 billion in deposits and $72 billion of SVB's loans, discounted by $16.5 billion.

First Citizens acquired SVB's 17 branches, which reopened as a division of First Citizens Bank the next day. This marked a significant expansion for First Citizens, which was already the 30th-largest bank in the United States in terms of assets at the end of 2022.

As part of the deal, around $90 billion of SVB's securities will remain in receivership. The FDIC received about $500 million in equity appreciation rights linked to First Citizens' shares.

If you or your company provided a service or product to Silicon Valley Bank prior to March 10, 2023, and have not been paid, you may have a claim against Silicon Valley Bank. You must file your claim on or before July 10, 2023, to avoid disallowance.

The FDIC has set up two claims agents to process claims for Silicon Valley Bank and Silicon Valley Bridge Bank, N.A. You can submit your claim to the respective claims agent at the addresses listed: 10539 for Silicon Valley Bank and 10542 for Silicon Valley Bridge Bank, N.A.

The priority of claims will be paid in the following order: depositors, general unsecured creditors, subordinated debt, and stockholders. Here is a list of the priority of claims:

Note that if you're a depositor, you don't need to take any action as your deposits will be automatically assumed by First-Citizens Bank & Trust Company.

You'll be relieved to know that depositors of Silicon Valley Bank will be made whole, even if their accounts exceeded the FDIC insurance limit of $250,000. This is thanks to the Federal Reserve's systemic risk exception.

The FDIC will continue to insure deposits up to the insurance limit, and depositors can continue to use their checks and ATM/Debit cards as usual. Direct deposits like paychecks and social security benefits will also continue without interruption.

Depositors can calculate their insurance coverage using the EDIE – Electronic Deposit Insurance Estimator tool. This will give them a clear understanding of how much of their deposits are insured.

The FDIC will prioritize depositor claims, ensuring that they receive their insured funds as quickly as possible. This is in addition to the systemic risk exception, which will cover uninsured deposits up to the full amount.

To file a claim, depositors should refer to the FDIC's instructions and submit their claim on or before the Claims Bar Date of July 10, 2023. Failure to file a claim by this date will result in disallowance of the claim.

Here's a summary of the priority order for claims:

Note that each depositor must file a separate claim with the Receiver, and the Receiver will not accept claims filed on behalf of a proposed class of individuals or entities.

The Federal Reserve Board of Governors released a postmortem investigation into the supervision and regulation of Silicon Valley Bank, focusing on lax oversight during the tenure of Randal Quarles.

The investigation called for a reevaluation of the rules for mid-sized banks, indicating a need for more stringent regulations.

The U.S. Securities and Exchange Commission and U.S. Department of Justice have opened investigations into the bank's financial disclosures and executives' recent trading plans.

A shareholder filed a Securities Class Action against the company in the U.S. District Court for the Northern District of California, alleging fraud for false statements made by executives and the bank.

Senator Elizabeth Warren introduced legislation to roll back some provisions of the EGRRCPA, including regular stress testing, cosponsored by about 50 Democrats in the Senate and House of Representatives.

The Senate Committee on Banking, Housing, and Urban Affairs held a hearing on March 28 regarding the bank failures, focusing on the Federal Reserve's oversight of banks.

Silicon Valley Bank (SVB) was shut down by federal regulators on March 10, 2023, making it the 16th largest bank in the United States to fail.

The bank's failure was attributed to a combination of factors, including its investments losing value and large amounts of money being withdrawn by depositors.

Federal regulators promised to make all depositors whole, even for those funds that weren't protected by the Federal Deposit Insurance Corporation (FDIC).

The Federal Reserve took steps to improve confidence in the banking system and prevent future failures, including its Bank Term Funding Program.

A key player in the aftermath of the collapse was First Citizens Bank, which struck a deal with the FDIC to buy SVB's deposits and loans, as well as certain other assets.

Here are the key players involved in the collapse and recovery of SVB:

Silicon Valley Bank was founded in 1983 by Roger King and Bill Biggerstaff.

The bank's early success was driven by its focus on serving the tech industry, which was rapidly growing in the area.

SVB's customer base expanded rapidly, with the bank's assets growing to over $200 billion by 2022.

SVB's financial health was not without warning signs, however, with the bank reporting a loss of $1.8 billion in the fourth quarter of 2021.

This loss was largely due to a decline in the value of the bank's investments in the tech sector.

Silicon Valley Bank announced its $1.8 billion loss on its bond portfolio on March 8.

This loss was a significant blow to the bank's financial stability, and it's no wonder that Moody's downgraded Silicon Valley Bank's long-term local currency bank deposit and issuer ratings soon after.

The stock for Silicon Valley Bank's holding company, SVB Financial Group, crashed at the market opening on March 9, causing a ripple effect that hit other major banks as well.

In just one day, a total of $42 billion in attempted withdrawals were made from SVB, highlighting the bank's instability.

Trading was halted for SVB Financial Group stock on March 10, and federal regulators stepped in to take control of the bank.

Here's a breakdown of the key events leading up to the collapse:

HSBC Holdings Plc announced on March 13 that it would buy the U.K. arm of Silicon Valley Bank, Silicon Valley Bank UK Limited, for 1 pound.

Silicon Valley Bank launched on October 17, 1983, as a wholly owned subsidiary of Silicon Valley Bancshares, with 100 initial investors, including NFL quarterback Jim Plunkett.

The bank's first office was located on North First Street in San Jose, and it was founded by Wells Fargo executive Bill Biggerstaff and Stanford University professor Robert Medearis, who met while playing tennis.

Initially, startup founders seeking loans from the bank had to pledge about half of their shares as collateral, but the rate later fell to about seven percent, reflecting a low failure rate and founders' tendency to pay off the loans to stay in control of the company.

The bank covered losses by selling the shares to interested investors, and it became common for venture capital firms' term sheets to require startups to create a bank account at Silicon Valley Bank specifically.

SVB acquired National InterCity Bank of Santa Clara in 1986, and it opened its first office on the East Coast in 1990, near Boston, to serve the Massachusetts Route 128 tech corridor.

The bank grew with the local high-tech economy, achieving 21 consecutive quarters of profitability, and it went from a loss of $39,000 in 1985 to a profit of $12.3 million in 1991.

Silicon Valley Bank was born out of a poker game in 1983, when Bill Biggerstaff and Robert Medearis came up with the idea for the bank.

The bank's founders, along with CEO Roger Smith, opened the first branch in San Jose, California, marking the beginning of a remarkable journey.

In 1988, Silicon Valley Bank went public, and two years later, it moved to Menlo Park to solidify its presence in the venture capital world.

This strategic move helped the bank grow exponentially, and by 2019, it had become one of the largest commercial banks in the US.

Between 2019 and 2022, Silicon Valley Bank nearly tripled in size, rising from the 34th largest bank to the 16th.

During this period of rapid growth, the bank accumulated a significant amount of deposits and assets, with most of the excess being used to buy Treasury bonds and other long-term debts.

Depositors with accounts at Silicon Valley Bank were initially at risk of losing money above the $250,000 insured threshold. The FDIC insures bank deposits of up to $250,000 per depositor per bank for each account category.

However, the Federal Reserve invoked a systemic risk exception, meaning that all depositors would be made whole, even for those funds that were uninsured. This decision was made to prevent a potential contagion effect on the economy.

The FDIC can protect depositors from losses, but it can't do the same for shareholders and unsecured debt holders. Investors who owned stock in SVB Financial Group may not get their money back.

The largest shareholders of Silicon Valley Bank's holding company, SVB Financial Group, included institutional investors such as The Vanguard Group, BlackRock, and State Street Corporation.

Here are some of the main investors in Silicon Valley Bank:

Be cautious of scams related to Silicon Valley Bank's collapse. The FDIC will never contact you requesting private information.

If you receive an email or message claiming to be from the FDIC or Silicon Valley Bridge Bank, N.A., be wary and don't respond. The FDIC will encourage you to use their secure web portal for communication.

Be resistant to any scams that try to obtain information from you by pretending to act on behalf of the FDIC or Silicon Valley Bank.

In 2021, a Federal Reserve review of Silicon Valley Bank (SVB) found several deficiencies in its risk management procedures.

The bank failed to fix six citations issued by the Fed and was placed under a full supervisory review in July 2022.

SVB officials met with Fed officials to discuss the bank's ability to raise cash in a crisis and possible exposure to losses as interest rates rose.

Fed officials determined the bank was using flawed models that led SVB officers to incorrectly believe rising interest rates would increase the bank's interest revenue to substantially stabilize its financial condition.

In the week before the collapse, Moody's Investors Service informed SVB Financial that it was facing a potential double-downgrade of its credit rating because of its unrealized losses.

This led to a series of events that ultimately contributed to the bank's downfall.

On March 8, 2023, SVB announced it had sold over $21 billion worth of its investments, borrowed $15 billion, and would hold an emergency sale of its stock to raise $2.25 billion.

However, this attempt to stabilize the bank only led to further panic among investors.

JPMorgan Chase and Bank of America turned down opportunities to acquire the bank, and investors at several venture capital firms urged their portfolio companies to withdraw their deposits from the bank.

By the close of business on March 9, customers had withdrawn $42 billion, leaving the bank with a negative cash balance of about $958 million.

SVB's CEO, Greg Becker, sold 12,451 shares of company stock worth $3.6 million just days before the bank's collapse.

This sale has raised concerns about insider trading and the lack of transparency in executive trading practices.

If you're concerned about becoming a victim of fraud, be aware that you won't receive any communication from the FDIC requesting private information.

You'll want to be watchful for and resistant to any scams to obtain information from you by individuals or entities claiming to act on behalf of Silicon Valley Bank, Silicon Valley Bridge Bank, N.A., or the FDIC.

The FDIC will encourage you to correspond with them via a secure web portal, specifically the Failed Bank Customer Service Center.

The FDIC will not contact you via email, so be cautious of any emails claiming to be from them.