Silicon Valley Bank (SVB), one of the largest banks in the United States catering to the technology industry, collapsed just 48 hours after a bank run by its depositors. This event marks the largest failure of a financial institution since the height of the financial crisis more than a decade ago.
The collapse of SVB has caused global start-up companies to call for emergency support from governments as they fear bankruptcy. The bank had $209 billion in assets and about $175.4 billion in deposits at the end of 2022, making it a significant player in the industry.
The bank’s failure was caused by a sharp decline in the value of government bonds due to a rapid interest rate rise, which led to a bigger interest burden for its deposits. As the bank announced large-scale financing to cope with the withdrawals of its customers, a bank run began. U.S. tech companies struggling with tight capital due to high-interest rates made withdrawals, causing panic in the market. About $42 billion was withdrawn on Thursday alone, and SVB’s stock price fell by over 60 percent.
SVB was shut down by the Department of Financial Protection and Innovation in California on Friday morning, and the Federal Deposit Insurance Corporation (FDIC) was named the receiver. The FDIC has promised that customers will get all of their deposits back, including money above the $250,000 limit for federal deposit insurance.
The bank’s collapse is considered the second-biggest bank failure in the United States since the collapse of Washington Mutual in 2008. Companies in Silicon Valley are now fearing a series of bankruptcies, with some even worrying about ‘Monday the 13th’, which is an expression based on a conventional belief that ‘Friday the 13th’ is an ominous day.
SVB’s demise has had a ripple effect outside the US as well, with Signature Bank, another bank that specialized in crypto and catering to midsize businesses, facing a crisis of confidence after the collapse of SVB. Signature Bank was closed by regulators on Sunday, making it the third-largest bank failure in history.
The failure of Signature Bank is expected to further cut the crypto industry off from the regulated US banking system. Some of the largest digital asset companies, including Circle Internet Financial Ltd., Coinbase Global Inc. and Payward Inc.’s Kraken, used Signature Bank.
The sudden collapse of Silicon Valley Bank and Signature Bank has raised concerns about the soundness of the entire banking sector, especially with the rapid rise in interest rates, which is lowering the value of bonds in their portfolios and increasing the cost of credit.