Silicon Valley Bank, a SVB Financial Group subsidiary, collapsed after a tumultuous 48 hours that saw a bank run and a capital crisis. The bank’s failure marks the second-largest collapse of a financial institution in US history. The bank primarily serves the startup and venture capital industries, now facing significant disruption.
Essential Information About SVB Financial Group’s Collapse
- SVB Financial Group, a California-based bank that finances nearly half of US venture capital-backed healthcare and technology companies, has collapsed due to inadequate liquidity and insolvency.
- Startups withdrew deposits from SVB to fund their operations as private financing became harder, leading to a $1.8 billion loss for the bank.
- The value of their long-term bonds fell due to rising interest rates, resulting in mark-to-market accounting unrealised losses of over $15 billion for securities held to maturity.
- A week before the collapse, Moody’s downgraded SVB’s credit rating because of its unrealised losses.
- SVB 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, but Moody’s still downgraded SVB.
- Customers withdrew $42 billion, leaving the bank with a negative cash balance of about $958 million. The company’s shares plummeted until trading halted on March 10.
- The California Department of Financial Protection and Innovation (DFPI) issued an order taking possession of SVB, appointing the FDIC as a receiver after Federal Reserve agents and the FDIC assessed the company’s finances.
- Uninsured deposits represented 89% of total deposits, but Moody’s expects a recovery rate of 80-90% for uninsured depositors.
- The collapse of SVB has had a ripple effect on the cryptocurrency industry, with Circle revealing it had $3.3 billion at the financial institution of the approximately $10 billion cash reserves backing its stablecoin.
- The FDIC will begin covering uninsured deposits with special dividends as SVB’s assets are liquidated. SVB was the largest collapse of any bank since the GFC of 2007-2008 and the second-largest in U.S. history.
Who is SVB Financial Group?
SVB Financial Group is a California-based bank specialising in financing venture capital-backed healthcare and technology companies. It has been a cornerstone of Silicon Valley’s ecosystem, providing banking services to some of the world’s most innovative and high-growth companies. With assets of nearly $500 billion, it was considered one of the most financially stable banks in the country until its recent collapse.
What Has Happened to SVB Financial Group?
SVB Financial Group, or SVB, collapsed on March 10, 2023, after it suffered a massive run on deposits by its customers, primarily venture capital-backed startups. The run on deposits came after Moody’s Investor Service downgraded SVB’s credit rating, a week after it informed the bank that it was facing a potential downgrade due to its unrealised losses.
The bank had announced on March 8, 2023, that it had sold over $21 billion worth of its investments, borrowed $15 billion, and held an emergency sale of its stock to raise $2.25 billion. Venture capitalists urged their portfolio companies to withdraw their deposits from SVB. On March 9, customers started $42 billion, leaving the bank with a negative cash balance of $958 million. The company’s shares plummeted until trading halted on March 10.
Federal Reserve agents and the FDIC arrived at the offices of SVB on March 10 to assess the company’s finances. Several hours later, the California Department of Financial Protection and Innovation (DFPI) issued an order taking possession of SVB, appointing the FDIC as receiver.
What Caused SVB Financial Group to Collapse?
SVB Financial Group’s collapse was due to inadequate liquidity and insolvency. Before March 9, 2023, the bank was in sound financial condition, according to the California Department of Financial Protection and Innovation. However, startup companies began withdrawing deposits from SVB to fund their operations as private financing became harder, leading to a $1.8 billion loss for the bank.
Additionally, the value of their long-term bonds fell as interest rates rose during the 2021-2023 period, resulting in mark-to-market accounting unrealised losses of over $15 billion for securities held to maturity. The combination of these factors made it difficult for SVB to meet its financial obligations, leading to its collapse.
Who is Affected by the SVB Financial Group Collapse?
The collapse of SVB Financial Group has significantly impacted its depositors and the broader banking industry. SVB was known for its focus on tech and innovation, making it a crucial player in the startup ecosystem. Its collapse has sent shockwaves through the industry, leaving many questioning the resilience of other banks and the potential impact on the innovation economy.
Uninsured Depositors
The failure of SVB is expected to have significant implications for uninsured depositors. Uninsured deposits represented 89% of total deposits at the bank, leaving many customers in financial limbo. However, Moody’s Investor Service reported on March 10 that it expected a recovery rate for uninsured depositors of 80–90%. In response to the collapse of SVB, the FDIC has said it will begin covering uninsured deposits with special dividends within days as SVB’s assets are liquidated. The Deposit Insurance National Bank of Santa Clara was established to re-open the bank’s branches the following Monday and enable access to insured deposits.
Impact on the Cryptocurrency Industry
SVB’s collapse has also been felt in the cryptocurrency industry. Circle, the company behind the USDC stablecoin, revealed that it had $3.3 billion at the financial institution of the approximately $10 billion cash reserves backing its stablecoin. The collapse of SVB has reignited debates about the benefits of decentralised finance and the risks associated with traditional financial institutions.
SVB’s collapse was the largest bank since the global financial crisis of 2007–2008 and the second-largest in U.S. history. It is a reminder of the fragility of the financial system and the potential risks associated with financial institutions that are heavily focused on a particular industry or sector.
The collapse of SVB is a cautionary tale for all financial institutions and highlights the importance of sound risk management practices and maintaining adequate levels of liquidity. While the failure of SVB is undoubtedly a significant event, it is essential to remember that the broader financial system remains sound, and regulators have taken swift action to contain the fallout.
The collapse of SVB is a stark reminder of the importance of transparency, risk management, and effective regulation in the financial system. As the industry continues to evolve and innovate, financial institutions and regulators must remain vigilant in their efforts to ensure the stability and integrity of the financial system.
How Does the Collapse of SVB Financial Group Affect the Cryptocurrency Industry?
The collapse of SVB Financial Group had a ripple effect on the cryptocurrency industry, with Circle, the company behind the cryptocurrency USDC, revealing that it had $3.3 billion at the financial institution of the approximately $10 billion cash reserves backing its stablecoin.
What Will Happen to Uninsured Deposits With SVB Financial Group?
Uninsured deposits represented 89% of total deposits at SVB Financial Group. However, Moody’s Investor Service expected a recovery rate for uninsured depositors of 80–90%.
What is the Plan for SVB Financial Group Reopening?
Insured depositors will have full access to their deposits by Monday morning, with FDIC’s $250,000 per insured bank. Those with accounts of more than $250,000 are advised to contact FDIC directly. Uninsured depositors will receive an advance dividend and a receivership certificate for the remaining amount of their uninsured funds. SVB’s main office will reopen Monday, and banking activities, including online banking, will resume on the same day.
What Will happen to Uninsured deposits at SVB Financial Group?
Uninsured deposits represented 89% of total deposits at SVB Financial Group. However, Moody’s Investor Service expected a recovery rate for uninsured depositors of 80–90%.
How Did Investors React to the News of SVB Financial Group’s Collapse?
VC investors were particularly concerned about the collapse of SVB Financial Group as the bank was a significant source of funding for many of their portfolio companies. Some investors at VC firms urged their portfolio companies to withdraw their deposits from SVB, further exacerbating the bank’s liquidity issues.
The collapse of SVB also had a ripple effect on the financial markets, with the bank’s shares plummeting and trading of SVB being halted on the morning of March 10. The failure of SVB was the largest of any bank since the GFC of 2007–2008 and the second-largest in U.S. history, which caused widespread concern among investors and financial markets. The collapse also raised concerns about the financial stability of other banks and the potential for contagion in the financial sector.
