There has been surprising bank worries lately with many feeling the Silicone Valley Bank may be another Lehman Brothers incident which happened in the recession of 2008. The public has seen the headlines with the popular bank known as SVB or Silicone Valley Bank including it’s collapse beginning early March. The stock price of Silicone Valley Bank had reached at one point $700 per share from October 2021 to January 2022. By today’s date the stock price has plummeted to a low level of $100 to $80, but the FDIC or Federal Deposit Insurance Corporation has taken hold of it. It was a highly regarded bank which kept funds of many different start up groups holding a total of hundreds of billions of dollars. Other failing banks were somewhat involved in this incident including Silvergate Bank, Signature Bank, and there are fears about First Republic Bank failing as well.
Silicone Valley Bank Collapse
Silicone Valley Bank was added on March 10 to the list of failing banks in history which has spooked everyone in the United States. So…..why exactly did this happen to a bank which held hundreds of billions of dollars at some point? Individuals theorize that there was much more behind the scenes than most outlets report on. For example, many different articles including mainstream media state it was simply due to a bank run that happened very quickly. Everyone panicked about not losing their money causing them to pull out all their funds. FDIC is an outstanding insurance which covers up to $250,000 per bank and per account. The reality of the situation is much darker as over 90% of the companies involved with SVB had much more than the insurance amount covers. Many wonder what’s going to happen to their payrolls and will their money be lost to the failing banks?
- Silicone Valley Bank (SVB) was founded in 1983 and HQ’ed in Santa Clara, California
- SVB contained $209 billion in total assets
- SVB contained $175.4 billion in total deposits
- Of the total $151.6 billion was uninsured
- EGRRCPA enacted in 2018 supported by SVB CEO Greg Becker
- EGRRCPA with the Dodd-Frank Act helped increase the likelihood of the collapse
- SVB grew substantially during the COVID-19 Lockdowns in 2020 to 2021
- During the growth and after the lockdowns SVB invested their money in long term bonds
- In April 2022 the chief risk officer of SVB resigned
- Another chief risk officer was hired around 8 months afterward in 2023
- During the recent inflation rate hikes the bonds purchased lost value
- Losses in SVB investments reached $15 billion dollars
- Bonuses were paid out to employees prior to it’s full collapse
- Executives, the president, and CEO sold millions of stock under SVB Financial Group
Companies Involved
As we see from the timeline of events, Silicone Valley Bank was a 40 year old bank which mostly included start up tech companies. They were highly valued from multiple different sources such as Jim Cramer and Forbes 2023 best banks. Many companies were depositors such as wineries, tech companies, and medical companies including, but not limited to:
- Roblox
- Roku
- Circle
- BlockFi
- Buzzfeed
- Binance
- Coinbase
- Ginkgo Bioworks Holdings
- Rocket Lab
- iRythm Technologies
These are just some of the companies involved with the failed bank and it appears Silicone Valley Bank wasn’t going to be initially bailed out by federal regulators. Now it appears that federal regulators are going to completely provide the missing or lost funds to those who deposited with Silicone Valley Bank. It appears that the federal regulators decided against their initial decision and pulled a 180 degree turn. In essence it appears the bank is not going to be bailed out in fully, but all the depositors are going to be able to receive their funds. This decision was praised by Gavin Newsom who had multiple wineries with money in the failed bank.
Other Banks Failing
The topic has reached millions in the United States with fears about other major banking companies such as Bank of America, Wells Fargo, JP Morgan Chase, and Citi Bank to name a few. Reality of the situation is that many of these banks will most likely not fail. The reason for this is that they have numerous different methods of investing their income compared to Silicone Valley Bank. SVB was simply a very niche bank for a niche field such as companies starting up.
The simplicity of the event is that it shocked millions hearing about a banks collapse with some others included such as Signature, First Republic, Credit Suisse, and Silvergate. There is a huge issue here mounting above the American citizens who have lost a significant amount of trust in the financial system. It’s important to note that one of the major issues for Silicone Valley Bank’s collapse was the fact that they invested a large amount of their money in bonds coupled with the higher interest rates with the Federal Reserve Board.
It was a perfect storm getting energy through many horrible decisions of not diversifying their investments and banking on the fact that their lower interest bonds will continue to be profitable. The difficulty of this storm began with SVB’s growth during the COVID-19 lockdowns allowing them to gain much more money than they knew what to do with. The additional factor includes that tech companies have had a recent downtown after the pandemic ended.
Tech Companies and Layoffs
Tech companies have started off the end of last year and the beginning of this year with major lay offs and a lack of income. This may be in part due to the end of the COVID-19 pandemic which allowed people to finally go to work and get off their computers, phones, and tablets. Downturn in profit is normal in many industries like restaurants, automotive, retail, and real estate. However, it appears that the tech industry may be extremely volatile during the downturns in profit. Many major technology companies laid off tens of thousands of employees including, but not limited to:
- Google or Alphabet
- Meta or Facebook
- Yahoo
- Zoom
- Amazon
- Coinbase
- Crypto.com
- IBM
- Dell
- PayPal
- Salesforce
- SiriusXM
- Vimeo
- Spotify
At this point hundreds of thousands of workers have lost their jobs including those working at the Silicone Valley Bank. A serious matter such as this has caused them to need more money than normal especially with the lower profit margins. This is also the reason they began to withdraw their stored up money in the bank. Just like a normal person when our income begins to wain there must be some withdrawals from our savings. With so many companies requiring that extra boost it led to the bank run appearing on many news outlets today. Ultimately SVB did not have enough liquidity at the time to address the withdrawals coming in so frequently and on mass.
Conclusion
Today one of the main banks known as Silicone Valley Bank has fallen into disarray to the point of no return. With Silvergate failing before, Signature Bank failing with, and First Republic Bank potentially failing after. The news has hit millions of homes from mainstream media and multiple news outlets such as USA Today, CNBC, and NPR. The problem lies with poor management from SVB and the lack of a chief risk officer.
Growth from Silicone Valley Bank was substantial for multiple years topping out with a stock price of up to $700 dollars per share. Sadly, they envisioned the golden age of tech to continue on and shoved a large percentage of their money into bonds at a lower interest rate. Once the interest rates were raised by the Federal Reserve also known as the Fed, the bonds SVB purchased became weaker. The weakening grew rapidly with interest rates topping up to 5% which were near zero during the COVID-19 pandemic.
This caused the bank to have low liquidity which would’ve been okay if technology companies continued to flourish. However, the tech companies began to weaken as well with massive layoffs requiring large amounts of money to be withdrawn from their bank. As Silicone Valley Bank witnessed the events occurring they attempted to halt the problem by selling their purchased bonds at a loss.
The losses for SVB continued to grow with a so called bank run coming into the effect. Finally, federal regulators decided to step in by preventing those millionaires from losing their stored deposits in the bank. It goes to show with a combined effort there could be massive implications whether its companies or the public involved. Hopefully this major problem stays isolated to niche purposed banks and doesn’t spread into everyone’s pocket. Time will tell the tale, but right now Americans are watching carefully nationwide.