Banks don’t collapse very often, so when you hear about it in the news, it tends to pique your interest. Silicon Valley Bank’s collapse is especially unique given its concentrated focus yet impressive size.

What is Silicon Valley Bank?

Silicon Valley Bank (SVB) is a mid-size regional bank in the heart of the tech universe. The bulk of its clientele are venture capital & early-stage investment firms, as well as many of the tech start-ups they back, both small and large in market share.

The influx of cash into tech start-ups over the years allowed for SVB’s rapid growth. In 2018, SVB’s annual revenue was $2.7 billion. By the end of 2022, annual revenue was $7.4 billion (4). Similar to most banks, SVB invested a portion of its deposits in traditionally safe assets, such as treasury bills and lower risk debt investments.

How Does a Bank Collapse?

Although there are several causes, two issues combined for a major problem. The first of which was the rising cost of business for its clientele of tech start-ups, an industry that has been hit particularly hard in the past 12 months. The owners needed to increase withdrawals to keep up with the rise in business and labor expenses. This alone may have been sustainable, if not coupled with the second issue of rising interest rates.

It is believed that the bank owned a debt portfolio that was constructed over previous years when interest rates were incredibly low (5). As the Fed raised rates over the last 12 months, the value of SVB’s portfolio eroded (remember bond prices go down when interest rates go up). As client requests for cash accelerated, SVB was required to liquidate those assets at a loss.

As withdrawal requests came in and rumors of SVB’s issues circulated the tech industry, many of their depositors rushed to pull their money, causing a run on the bank. Apparently needing $2.25 billion to shore up their balance sheet, the Federal Depository Insurance Company (FDIC) stepped in to assume control of the bank, as well as its $175 billion in customer deposits (1).

What Happens Next?

With SVB officially under FDIC control, many decisions will need to made with regards to depositors and their account balances, and if insurance will be offered to those outside the traditional guidelines. A major issue at hand is the fact that SVB has many clients who possessed accounts in excess of $100 million (2). FDIC regulation allows for the company to fully insure any client deposits up to $250,000, with no guarantees for those with more.

Discussions over the weekend between the FDIC, the Federal Reserve, and others have led to rumors that clients with larger account balances will also be made whole, leaving questions of how the funds will be sourced and from where. The final resolution is still to be determined, but it is apparent the situation will lead to a review of current regulations and standards, one of which being the $250,00 coverage and whether it should be increased.

It’s been argued that $250,000 is becoming less significant in some industries and can be strenuous on companies with large cash balances who need to obtain appropriate coverage through the use of various banks. While others believe the amount serves a dual purpose. It both protects companies when these type of situations arise, and, to a certain extent, also helps to keep the banks honest when it comes to the risks they’re willing/able to take with their client’s deposits. The smaller the safety net, the smaller the appetite for risk.

Is this 2008 all over again?

“Bank collapses” is a scary headline, especially for those who remember 2008, so it’s important to put it in context, as well as size and scope. The Global Financial Crisis of 2008 involved numerous banks and industries across the country and world. Silicon Valley Bank client base consisted primarily of early stage, tech starts-up with relatively low overhead. While there may be some aftershocks and new information in the future, the bank’s financial reach seems to be fairly isolated.

Is there anything I should be doing?

No need to start finding your favorite tree to bury your money. The FDIC has thus far acted as intended and swiftly, offering depositor of other insured banks some peace of mind.

If you are a business owner or family who hold large cash sums at the banks, this should serve as a prudent reminder to evaluate where and how your bank accounts are registered. The FDIC offers protect $250,000 per depositor, per insured bank, for each account ownership category (3). The ownership category is an important stipulation. If you’re a couple with a Joint account more than the protected amount, consider splitting into personal accounts and adding TOD designations. If you’re one individual, consider utilizing various banks or a Trust. Seek help from your legal counsel to identify the methods to ensure you’re best protected.

While Silicon Valley Bank’s collapse will likely give some investors jitters and lead to continued volatility, the extent of the damage seems to be manageable thus far. We’ll better understand the situation as new details come out in the coming weeks and will provide updates if news changes.

Cirrus Wealth Management

Sources:
1. Silicon Valley Bank Collapse: What We Know and How It Happened, Vivian Giang & Jessica Silver-Greenberg, New York Times, https://www.nytimes.com/article/svb-silicon-valley-bank-explainer.html
2. Silicon Valley Bank: What Happened, Fidelity Investments, https://www.fidelity.com/learning-center/personal-finance/silicon-valley-bank-collapse
3. Federal Depository Insurance Company, Your Insured Deposits, https://www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits/#:~:text=The%20standard%20deposit%20insurance%20amount,another%20separately%20chartered%20insu
4. SVB Financial Group Revenue 2010-2022, MacroTrends, https://www.macrotrends.net/stocks/charts/SIVB/svb- financial-group/revenue
5. Silicon Valley Bank fails. Is there a contagion risk? Erik Ristuben, Russell Investments, March 12, 2023,