Silicon Valley Bank’s closure and its implications

Silicon Valley Bank (SVB), a major creditor to the technology industry, was closed by regulators on Friday, March 10th, due to worries about its financial stability. 

It’s the second-largest U.S. bank failure since the Great Recession. The stock dip led to wider market losses, with worries surfacing that other financial institutions might face similar problems.

What is Silicon Valley Bank?

Silicon Valley Bank is an American financial institution that provides loans, banking services, and venture capital to business owners in the tech industry. It offers various services tailored to clients in the tech space, including credit products, international expansion services, venture debt finance and more.

Established 37 years ago, the bank has become one of the largest in America, with assets worth $210 billion. Reports suggest that some of their clients are big tech giants like Airbnb, Cisco, Fitbit, Pinterest and Square.

What caused the closure?

On March 8th, SVB revealed its intention to increase its capital by $2 billion as a way to protect its finances in the face of losses brought on by the tech sector’s slowdown. Additionally, the bank reported that more startup customers were withdrawing their investments. Moreover, its securities have declined in value since interest rates began climbing.

Consequently, the market panicked, and shares in the company were sold off heavily and tumbled dramatically.

Gary Becker, the CEO of SVB, sought to reassure tech investors later in the day, asking them to remain level-headed. He warned that the only real threat to SVB was if a false narrative was spread, causing people to view the situation apprehensively.

It seems to have mutated into a self-fulfilling prophesy, with tech tycoons like Peter Thiel reportedly counselling new business proprietors to cut down on their exposure to SVB.

At the close of trading, the stock in SVB was down by a dramatic 60%.

On Friday the 10th, reports surfaced that SVB had been unable to acquire the capital it aimed for and was searching for a purchaser as outflows of deposits persisted to gain speed.

As people began to assemble outside SVB premises, both state and federal authorities in California had reached the same conclusion: they were going to take control of SVB’s deposits and place them into receivership.

What comes next?

Before the shutdown, some banking analysts were sceptical about a likely contagion that could destabilize the banking sector coming from SVB’s difficulties; however, they did not completely rule out the chance of it going under. This assessment is due to the large banks’ greater liquidity, diversified business models, ample capitalization, risk management proficiency, and stricter regulatory oversight.

Yet the acute unsettling feeling among investors wiped out the brief improvement of the general market, leaving the Dow Jones index down 1.3%, the S&P 500 down 1.7%, and the tech-heavy Nasdaq taking a hit with a 2% decline.

The shock to Silicon Valley is immense as SVB was deeply embedded in the lives of many entrepreneurs.

Startup executives, who have their companies banked with SVB, face a payroll crisis.

 As the FDIC is only authorized to release insured deposits up to $250,000, this increases the probability that these companies will be forced to declare furloughs or layoffs of numerous workers.

2023 is shaping to be a reckoning year for the tech industry, marked by layoffs, financial downturns and other momentous shifts like this one.