In early March, Silicon Valley Bank (SVB), one of the world’s largest venture capitalist banks, experienced an abrupt downfall. From poor strategic planning within the company to issues plaguing the entirety of the technology sector, the factors in the bank’s sudden collapse reflect the changes the Bay Area has endured over the last few years. The SVB bankruptcy exemplifies Silicon Valley’s prolonged yet dwindling dominance in technology and exists as a warning to all financial institutions that no one is invulnerable to failure in this new age.

Located in sunny Santa Clara, SVB was founded by the friends Bill Biggerstaff, a Wells Fargo executive, and Robert Medearis, professor at Stanford University. “The original idea sort of kept hitting me in the head with my students, because they literally, really wanted to find money to start backing a new idea,” Medearis said in a 2014 Computer Science Conference. 

Aiming to provide financial support to startup companies mainly within the thriving technology sector, SVB was instrumental in the rise of Bay Area-based companies such as Cisco Systems and Bay Networks, both of which have since then become staples in the Bay Area economy. Additionally, several high-profile companies such as Roku, Rocket Lab USA, and even Roblox, were all previous clients of SVB and all held accounts containing enormous amounts of liquidity. The pure balance of these accounts would be critical during the collapse and was a major reason for the liquidity failure that ensued.

The main cause of the crash came from the chosen investments of Silicon Valley Bank. While the bank took a passive approach to investments from a credit viewpoint, SVB focused on investments with long maturities, such as treasury bonds and mortgage bonds, which are set in place for several years with hopes of steady returns. However, with interest rates rising just over a year prior to the downfall, the holdings now held less value than the newer government bonds. Along with the trouble of growing interest rates, many bank clients started to withdraw more money, forcing SVB to sell several of its investments.

What started as an investor letter announcing the 1.8 billion dollar loss on the sale of securities, including the treasury and mortgage bonds, turned into a nightmare for holders and investors alike. Shares instantly dropped 60% just one day after the statement, and money began flowing out of the bank. In a flash, alarmed customers withdrew $42 billion from the bank, accompanied by another $100 billion the following day. With the bank in a dire situation, regulators from the Federal Deposit Insurance Corporation seized the bank on March 10 to protect depositors in SVB, and the bank was eventually sold to First-Citizens Bank.

Following the collapse of SVB in early March, several other banks, most notably including First Republic Bank, experienced severe liquidity failures. First Republic, similarly to SVB, was headquartered in the Bay Area and held several high-profile clientele among the Bay’s technology sector. The unexpected influx of deposit withdrawals from First Republic clients was largely due to the vast amounts of deposit funds that remained uninsured by the FDIC amid rising interest and inflation rates, lowering client confidence to the point of no return. Although First Republic’s future seemed stable for a time thanks to deposits by other major banks and government loans, the damage caused by the liquidity failure proved too great to rescue and the FDIC seized its assets on April 29. JP Morgan Chase subsequently purchased all of First Republic’s ownings and took up services for its remaining clients on the following day.

Although the bank failure just struck, SVB showed signs of an unstable future more than a year before its actual collapse. Many agencies, outside consultants, and advisors from the bank itself saw trouble ahead for their investments, but were unable to persuade the bank to change course. 

CONCLUSION

Referred to as “the worst banking collapse since 2008” by many media outlets, SVB’s collapse sets a dangerous precedent for banks and technology companies in the new age of digital technology. As seen in the mass selloff of SVB stock and the enormous volume of withdrawals from SVB accounts in the days leading to the scandal, mass media, specifically social media platforms like Twitter and Facebook, continue to demonstrate their influence on the decisions of investors and banking clients. From minute-based stock volatility to increasing stigma on failing institutions brought forth by the media, today’s age of technology and communication is capable of changing public perception of an institution in mere seconds.