If you work in tech, you had probably heard of Silicon Valley Bank before now. If you’re not familiar with this seemingly regional bank, nobody’s blaming you. It had billions of dollars in deposits, but fewer than two dozen branches, and generally catered to a very specific crowd of startups, venture capitalists, and tech firms. Anyway, you’re here now — Silicon Valley Bank isn’t.
Banking regulators shut down Silicon Valley Bank, or SVB, on Friday, March 10, after the bank suffered a sudden, swift collapse, marking the second-largest bank failure in US history. Just two days prior, SVB signaled that it was facing a cash crunch. It first tried to raise money by selling shares and then it tried to sell itself, but the whole thing spooked investors, and ultimately, it went under. On Sunday, March 12, the federal government said it would step in to make sure all of the bank’s depositors would have access to their funds by Monday, March 13. Regulators also shuttered another bank, Signature Bank of New York, which had gotten into crypto, and the federal government said its depositors’ money would be guaranteed as well.
“Thanks to the quick action my administration [has taken] over the past few days, Americans can have confidence that the banking system is safe. Your deposits will be there when you need them,” President Joe Biden said on Monday, March 13, in brief remarks delivered on the White House’s response. He emphasized that taxpayers won’t wind up footing the bill for the government’s actions: “Instead, the money will come from the fees that banks pay into the [FDIC] deposit insurance fund.”
In late March, the North Carolina-based First Citizens Bank said it had entered into an agreement to acquire Silicon Valley Bank, ending the FDIC’s rather long search for a buyer.
The incident sent shock waves across the tech sector. When signs of shakiness at SVB began to show, many companies and people with money in SVB moved to pull it out earlier in the week — actions that, ironically, contributed to the bank’s demise. Not everyone was able to get their cash out, and the FDIC only insures deposits up to $250,000, so customers who had more than that in SVB have spent some days in a panic, though the government ultimately said their money will be there for them.
Beyond tech, this caused some shakiness across the banking industry, especially regional banks, amid concerns that other banks could be in trouble or that contagion could set in. (It’s important to note for consumers here that, really, the money you have in the bank right now is almost definitely fine.) It also had ripple effects in Europe. SVB’s blowup is a big deal and a symptom of bigger forces in motion in tech, finance, and the economy.
Michael Barr, the Federal Reserve’s vice chair of supervision, is now leading a review of SVB’s supervision to try to decipher what happened. The Department of Justice and Securities and Exchange Commission are reportedly undertaking probes as well.
Still confused about what’s going on? Here are the answers to nine questions you might just have. We’ll also be updating this list as this story develops.
1) What is SVB, and how big is it?
Silicon Valley Bank was founded in 1983 in Santa Clara, California, and quickly became the bank for the burgeoning tech sector there and the people who financed it (as was its intention). The bank itself claimed to bank for nearly half of all US venture-backed startups as of 2021. It’s also a banking partner for a lot of the venture capital firms that fund those startups. SVB calls itself the “financial partner of the innovation economy.” All that basically means it’s tightly woven into the financial infrastructure of the tech industry, especially startups.
(Disclosure: It’s not just the tech industry that banked with SVB. Vox Media, which owns Vox, also banked with SVB before its closure.)
This arrangement has been great for SVB when things were great for the tech industry and not so great when they weren’t. But for a long time now, things have been very, very good, and venture capitalists were giving a lot of money to a lot of startups and going through SVB to do it. SVB had more than $200 billion in assets when it failed, which is far less than, say, JPMorgan Chase’s $3.31 trillion or so. But SVB is the largest bank to fail since the Great Recession, as well as, again, one of the largest US banks to fail ever. —Sara Morrison
2) What happened to SVB?
Silicon Valley Bank met its demise largely as the result of a good old-fashioned bank run after signs of trouble began to emerge in the second week of March. The bank takes deposits from clients and invests them in generally safe securities, like bonds. As the Federal Reserve has increased interest rates, those bonds have become worth less. That wouldn’t normally be an issue — SVB would just wait for those bonds to mature — but because there’s been a slowdown in venture capital and tech more broadly, deposit inflows slowed, and clients started withdrawing their money.
On Wednesday, March 8, SVB’s parent company, SVB Financial Group, said it would undertake a $2.25 billion share sale after selling $21 billion of securities from its portfolio at a nearly $2 billion loss. The move was meant to shore up its balance sheet. Instead, it spooked markets and clients. The share price of SVB Financial plunged on Thursday. By Friday morning, trading of the stock was halted, and there was reporting SVB was in talks to sell. Big-name VCs such as Peter Thiel and Union Square Ventures reportedly started to tell their companies to pull their money out of the bank while they could.
“People started freaking out, and unfortunately, it would appear rightly so,” said Alexander Yokum, an analyst at CFRA Research who covers banking. By about midday Friday, regulators shut down the bank. —Emily Stewart
3) How did this happen so fast?
Part of SVB’s specific problem is that it was so concentrated in its business. SVB catered to venture capital and private equity — as that sector has done well over the past decade, so has SVB. But because the bank was also very concentrated with high exposure to one industry, that opened it up to risk. When things got bad for its non-diversified group of clients, it very quickly got bad for the bank.
“This has proven that having 50 percent plus of your business in one industry is very dangerous. They outperformed on the way up, but on the way down, that’s when you figure out how exposed you are,” Yokum said.
It didn’t help that another bank, Silvergate, which catered to crypto, said it was winding down around the same time or, again, that once there were signs of trouble at SVB, everybody kind of freaked out. “This is not a slow fall from grace here, this is quick,” Yokum said. It was one of the largest banks in the US, and it went down in a matter of two days. —ES
4) What does this mean for the banking system, and just how worried should I be about my bank?
There’s an argument to be made that it’s good for banks to fail from time to time. The longest stretch in US history without a bank failure was from 2004 to 2007, and, well, you know what happened after that. The overall banking industry is likely fine, and again, SVB probably would have made it through had everybody not freaked out at the same time. That said, SVB’s collapse isn’t great, especially for the people who are going to be stuck holding the bag. There continue to be concerns about the health of the broader banking system.
“There’s always a risk of contagion, because banking is fundamentally a game of trust and confidence,” said Aaron Klein, a senior economics fellow at the think tank Brookings Institution. “When they erode, the system becomes less stable.”
Yokum added there could be more trouble ahead as the Fed continues to increase interest rates in an attempt to cool down the economy and bring down inflation, especially if it does so aggressively. “The more rates go up, the more the banks on the edge start to become a problem,” Yokum said.
On March 22, the Fed said it would raise interest rates by another quarter of a percentage point, less than the half a point it was expected to raise rates, but also a sign it remains focused on fighting inflation.
Still, you don’t need to start pulling your dollars out of your bank and hiding them under your mattress. Also, remember up to $250,000 of bank deposits are insured by the federal government, so unless you’ve got more than that in there — which, if you do, congratulations — really, you’re fine. —ES
5) What does this mean for tech companies in the near term?
The most immediate issue for tech companies that had money tied up with SVB and haven’t gotten it out yet is a Very Big Question that doesn’t have obvious answers: What happens when I need to pay someone, like my employees?
While the FDIC has guaranteed deposits of up to $250,000, depending on the size of the company, that money wouldn’t go very far. This doesn’t just apply to companies that deposited cash with SVB — it’s also a question for companies using other SVB instruments, like revolver loans or credit cards. Vox Media, for instance, used SVB cards.
There were also real concerns about knock-on effects: Even if your startup didn’t use SVB, your vendors might have. And while the government’s announcement should give most companies assurance that they’ll be able to get their money back eventually, there will likely be some kinks to work out in the near term. —Peter Kafka
6) Why was SVB important to tech companies, and what made them different than other banks?
But most of the connections happened behind the scenes: Unlike other banks, tech industry observers say, SVB was willing to work with tech startups in ways other banks might have been more reluctant to, like helping early employees secure personal loans for a house.
More importantly, SVB was particularly flexible about lending tech startups money even though they didn’t have free cash flow (because tech startups usually lose money at the beginning of their lives) or much in the way of assets (because startups often don’t have much more than the brains of their founders and early employees when they launch). “If you are a startup company, you don’t look like a normal business,” says Sean Byrnes, a startup founder and investor who says he has used SVB for years. “Most banks, if you go to them and ask for a loan, they’ll laugh at you.” SVB was also often willing to work with founders who weren’t US citizens, which would be an obstacle for more traditional banks.
The upside for SVB could be meaningful, since in addition to charging interest, the company often received stock warrants that could pay off if the startup got acquired or went public. And when tech was on a tear, the downside was limited: Even failed companies were more likely to pay back SVB’s loans before other investors got their money back, and there would be a steady pipeline of other tech companies lined up to use their services. —PK
7) Did SVB collapse so quickly because it was tied to tech?
It certainly seems that way. That’s in large part because the tech startup world is tightly plugged into itself, with founders and executives constantly trading information and boasting on Twitter or text chains or Signal chats. One tech company pulling its money out of a bank is a story that quickly cascades to the leaders of other companies, who then tell leaders of other companies.
“[SVB was] uniquely susceptible given the communication interconnectedness,” says Charlie O’Donnell, a partner at VC firm Brooklyn Bridge Ventures.
And it wasn’t just tech founders talking to themselves: On Thursday, March 9, a wave of venture capitalists were explicitly telling their portfolio companies to take their money out of SVB immediately. A startup founder who doesn’t bank with SVB told Vox he got five calls that day from different investors telling him to pull his money.
Looking forward to the tweets from the VCs who sparked this bank run congratulating themselves on their prescience.— Matt Harris (@mattcharris) March 10, 2023
O’Donnell says he told his portfolio companies to do the same. He says about a third of the 60-odd companies in his portfolio used SVB, and that by the end of Thursday, all except one had pulled their funds.
There are other, related theories floating in techland, which will be harder to prove but certainly seem plausible. One is that tech founders were more susceptible to panic because they were acutely aware of recent crypto crashes, most notably at FTX, and didn’t want to get pulled under. Another is that youngish tech founders generally don’t have longstanding relationships with their banks, and may have never met their bankers in person, making it easier for them to see banks as commodities that can easily be swapped for each other. —PK
8) What is FDIC insurance, and how does it work? And will SVB customers get their $250,000 back?
The Federal Deposit Insurance Corporation was created in the wake of the Great Depression, when a lot of banks failed and their customers lost all of their money, to protect consumers who use American banks and provide some stability to the American banking system. If a member bank fails, its deposits — that’s the money you’ve put in said bank — are still insured for up to $250,000. Anything beyond that, and there’s no guarantee you’ll ever see again.
At least, that’s how it used to work. A few days after SVB’s failure, the Federal Reserve Board, Department of the Treasury, and the FDIC announced that it would “make available additional funding to eligible depository institutions,” which would reimburse depositors in full. That funding, the announcement said, will come from loans from the newly created Bank Term Funding Program.
Because this is so new, we don’t yet know exactly how it will all work or when depositors can expect to get their money back. The FDIC said earlier that the $250,000 insured funds would be available no later than Monday, March 13. It’s still trying to figure out who exceeds that $250,000 cap and by how much. If you’re one of them, FDIC wants you to call 1-866-799-0959. —SM
9) What’s happening with regional banks? Is the government just doing bailouts again?
The landscape is not looking incredible for regional banks right now, at least in the near term, as fear spreads they might face similar issues as SVB. But these troubles may be limited to the more specialized banks. That remains to be seen.
After New York state regulators shut down Signature Bank, which had become an important lender in the crypto industry, a storm appeared to be brewing around San Francisco’s First Republic Bank as well. Troubles there have eased but continue, and there are general jitters around US banks, especially regional ones, overall. In Europe, the long-troubled Credit Suisse was taken over by UBS in mid-March amid fresh turmoil.
Yokum, from CFRA, said he wouldn’t be surprised if a couple of other banks run into trouble, but likely not many — and not the big ones, such as JPMorgan, Wells Fargo, and Bank of America. “It will likely stay concentrated to a few select banks,” he said. “They’re diversified, and they have a ton of deposits. So even if they lose some, they’re still okay. They’re not close to the line of having to sell securities. I really do think it’s banks that cater to high net worth individuals and specialized banks.”
As to whether the government’s move to make SVB and Signature Bank depositors whole counts as a bailout, the answer is, well, pretty much yes. The White House has been careful to emphasize that this isn’t a 2008-esque situation because SVB and Signature aren’t going to be revived just as they were, and the money for depositors would come from a fund banks pay into, not taxpayers. But whatever technicalities aside, this is a bailout — the banks went under, the government is stepping in. When Vox asked Klein, of the Brookings Institution, whether this counts as a bailout, his response was simply: “BAILOUT all caps level.” —ES
Update, March 28, 10:15 am ET: This story was originally published on March 10 and has been updated several times to include developments around the SVB collapse, including most recently First Citizens’ purchase of SVB.