What caused Silicon Valley Bank to collapse and will customers get their money back?

Silicon Valley Bank’s failure is raising questions about what led to the collapse and what it means for the bank’s customer base of tech startups.

On Friday, the Federal Deposit Insurance Corporation (FDIC) shut down SVB and immediately seized control of the bank’s $209 billion in assets and $175.4 billion in deposits.

It marked the second-biggest bank failure in US history, second only to the collapse of Washington Mutual, which had assets of $307 billion when it went into receivership in September 2008.

SVB’s implosion swept across global markets as investors debated whether the bank’s collapse stemmed from its unique position serving the troubled tech sector or could be a sign of broader risks in the banking sector.

Here’s what we know so far about the Silicon Valley Bank collapse and what it means:

What led to the collapse of Silicon Valley Bank?

Founded in 1983, Silicon Valley Bank was the 18th largest bank by assets in the US before its collapse, with 17 branches in California and Massachusetts.

Based in Santa Clara, California, it primarily served startups in the technology and healthcare sectors.

Ultimately, SVB’s failure can be traced back to the Federal Reserve’s battle against inflation through aggressive interest rate hikes, which have battered the tech sector over the past year.

In 2021, when interest rates were close to zero and easy money flooded the economy, venture capital investments in startups rose to a record $671 billion in the US, according to KPMG.

That also meant booming business for SVB, as new bank customers increased their deposits at the bank, which almost doubled in 2021.

The bank then used the deposits to grow its loan portfolio, the basic business model banks use to turn a profit, even though its interest-bearing loans didn’t grow as fast as its deposits.

For safekeeping, SVB invested much of the additional cash from client deposits in US Treasuries and other government bonds, which is standard practice for banks.

The situation started to change after the Fed started raising rates a year ago. As interest rates rose, venture capital investments began to decline and SVB’s emerging clients withdrew their accounts at the bank faster than expected to cover expenses.

Charts released by SVB show sharp declines in overall VC investments (top) and the outflow of SVB client funds (bottom) over the past year as interest rates have risen.

Silicon Valley Bank CEO Greg Becker speaks at a conference in 2018. The bank’s collapse is the second largest bank failure in US history.

At the same time, the increase in interest rates also reduced the market value of the Treasury securities in which SVB had invested deposited funds.

On Wednesday, SVB revealed that faced with the loss of cash from declining deposits, it was forced to sell its bond holdings at a loss of $1.8 billion. The bank announced plans to seek $2 billion from investors to cover the shortfall.

The announcement sparked panic in Silicon Valley, and on Thursday some prominent venture capitalists, including Peter Theil, began urging their portfolio companies to withdraw any deposits from SVB.

What followed appears to be a classic bank run: a deluge of customer withdrawals that drives a bank out of business when it can’t meet demand for immediate cash.

SVB struggled on Friday to find alternative financing, including through the sale of the company. Later that same day, however, the Federal Deposit Insurance Corporation (FDIC) announced that SVB was shut down and placed under receivership.

Will SVB startup customers get their money back?

Following the close, the FDIC said SVB depositors will have full access to their insured deposits no later than Monday morning.

The federal agency insures each depositor up to at least $250,000.

For clients who have deposits greater than $250,000, which likely includes many of the bank’s start-up clients, what happens next is less clear.

Depositors with funds greater than the insured amount will receive a dividend within the next week and a certificate of receivership for the remaining amount of their uninsured funds.

As the FDIC sells off Silicon Valley Bank’s assets, future dividend payments may be made to uninsured depositors.

People walk through the parking lot at the Silicon Valley Bank headquarters in Santa Clara on Friday after financial regulators closed the bank.

The FDIC said that at the time of closing, the amount of uninsured deposits at the bank was not determined.

In theory, it’s possible that uninsured deposits could eventually be repaid in full, because the bank’s total assets are greater than the amount it owes to depositors.

At the time of the bankruptcy, SVB had $209 billion in total assets and owed depositors about $175.4 billion, according to the FDIC.

However, some of those assets could be difficult to liquidate, such as ownership stakes in unlisted companies or loans for early-stage startups.

Ultimately, only time will tell how much of the uninsured deposits are returned to customers.