Silicon Valley Bank Collapses, FDIC Takes Control

Silicon Valley Bank appears to be in the midst of the first run on a US bank since 2008. The Federal Deposit Insurance Corporation (FDIC) officially stepped in after the California Department of Financial Protection and Innovation shut down the bank on Friday morning.

In an effort to protect insured depositors, the FDIC created a national deposit insurance bank. But this only protects funds up to $250,000 and not all customers. The FDIC also announced:

^{“All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend by next week. Uninsured depositors will receive a receipt for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.”}

What happened to the bank?

The big signs of trouble came on Wednesday when SVBVB
announced that customers were burning through cash at a rate faster than the bank could raise capital to cover. Then customers panicked and the withdrawal requests began. SVB was forced to start selling off some of its own holdings.

As Bloomberg opinion columnist Matt Levine explains:

^{“If you were the Bank of Startups, just like if you were the Bank of Crypto, it turned out that you had made a hugely concentrated bet on interest rates. Your customers were flush with cash, so they gave you all that cash, but they didn’t need loans, so you invested all that cash in longer-dated fixed-income securities, which lost value as prices went up. But also, when interest rates went up, all of your customers smoked, because it turned out they were low-interest creatures, and in a higher-interest environment, they didn’t have money anymore. So they withdrew their deposits, so you had to sell those securities at a loss to pay them back. Now you’ve lost money and look financially shaky, so customers panic and withdraw more money, so you sell more securities, so you post more losses, oy oy oy.”}

On Thursday, not only did the SVB share plunge, but trading was eventually halted. There were reports that the bank’s own systems apparently crashed, leaving customers unable to confirm whether they had successfully withdrawn their money – or even begun the process.

On Friday morning, SVB was shut down by state and federal regulators and placed into receivership.

What will be next?

SVB, opened in 1983, has positioned itself as the best lender and bank for start-ups, venture capitalists and their managers. SVB is not alone. Crypto-friendly bank Silvergate CapitalSAY
also announced a shutdown Thursday.

All of this points to a potentially bigger problem for Silicon Valley. Tech companies need capital, and markets are already experiencing shocks as their valuations return to reasonable levels.

The FDIC squad was absolutely necessary to prevent the run from bleeding into other banks. But, make no mistake, this is a sign that the Valley is in for some rough water in the coming months. We must ask ourselves – how will these developments affect investors, shareholders, managers, creditors, directors, employees and other stakeholders?

We already know that technology workers across the country are directly affected. How? SVB’s closure is likely to delay previously planned pay runs for some employees in the technology company. For example, Rippling, a popular HR software company for tech startups, reported that it was struggling to get its clients’ employees paid on Friday. But the CEO also added that “going forward, pay runs through Rippling will have no exposure to SVB.”

Over the next few days, we will continue to see the ripple effects the SVB collapse will have on our startup ecosystem and its stakeholders.

A special thanks to my fellow, John Livingstone from CWRU Law. If you have any comments, suggestions, or feedback, please send them to John Livingstone [email protected] or to me [email protected].