🌉 Silicon Valley Bank Collapse – How did it happen, what will follow?

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The Silicon Valley Bank (SVB) collapsed. SVB is the 16th largest bank in the United States. It was shut down and seized by the FDIC on Friday.

It is the second-biggest bank collapse in US history.

What happened?

During the tech boom of the last ten years, SVB was the go-to bank for tech startups. It accumulated $175,000,000 in deposits. During the pandemic, SVB's deposits tripled.

When you deposit any amount to a bank account, this creates a liability in the bank's balance sheet. Therefore, the bank must have assets on the other side of the sheet to balance it out. A large share of these assets is in US treasuries.

Now that interest rates went up, the market price of US treasuries went down. While the US government still guarantees the face value of these papers at the maturity date, the value "as of now" on the free market deteriorated. When people realize this mismatch between liabilities and assets, they want to be the first who get their money out -- the recipe of a classical bank run. The more people withdraw their money, the more assets need to be sold -- with losses.

SVB lost deposits faster than they anticipated and its management saw the problem coming. They announced that they needed to raise capital and this was planned for March 9th. As a result, the stock price of SVB fell dramatically, and this started the bank run. Account holders tried to withdraw $42 billion in one day. The next day, the bank was closed by US regulators.

In such situations, most deposits of regular retail banks should be insured by the FDIC -- simply because most accounts would have a balance of $250k or below. However, SVB accounts are mostly held by tech startups with larger deposits -- used for paychecks, for example. It is assumed that more than 85% of SVB's deposits are uninsured.