Silicon Valley Bank was once the go-to bank for start-ups and technology companies seeking funding. However, the bank famously collapsed during the dot-com bust of the early 2000s, leaving many investors and start-ups stranded.
The collapse of SVB resulted in a reduced availability of capital for start-ups, which had a significant impact on the industry. It is crucial to understand what led to the bank’s collapse to prevent similar situations from occurring in the future.
Reasons and Consequences
SVB’s business model was simple: gain the trust of technology companies by providing them with tailored financial services. However, some factors led to the bank’s downfall. First of all, SVB had a few streams of business. It relied heavily on venture lending, accounting for 10% of the loan portfolio.
The company had to write off delinquent loans when the pandemic hit, which led to losses. Secondly, rising interest rates added to the bank’s woes. Unlike many banks that profit from deposits, SVB primarily depended on loans.
When interest rates increased, it added to the burden of servicing those loans. Lastly, the bank run played a critical role in the collapse. Depositors were losing confidence in the bank, which led to large numbers of withdrawals.
Consequently, SVB couldn’t meet the requirements for liquidity, and the bank was forced to seize operations. The consequences of SVB’s collapse were dire. Stockholders and unsecured creditors were left with worthless investments. The clients left without access to credit and other services.
First Citizens Bank Acquisition
This acquisition was seen as the silver lining from SVB’s fallout. First Citizen’s Bank purchased SVB in a cash-and-stock deal worth $2.2 billion. First Citizen perceived an opportunity to expand its offerings to the tech community.
The acquisition gave it access to SVB’s client base and expertise. This move was met with enthusiasm from the tech sector, who believed that this would ensure business continuity.
Federal Reserve’s Response
In response to the collapse of several banks, including SVB, the Federal Reserve announced the Bank Term Funding Program in 2020, the program aims to provide funding to ensure financial stability and support credit markets.
The program offered sizable long-term funding to eligible banks at favorable rates. This move helped mitigate the impact of bank collapses on the economy.
The SVB collapse highlighted the importance of diversity in banking. It’s advisable not to keep all eggs in one basket. Here are some tips to consider:
– FDIC Limits: Deposits up to $250,000 with a single banking institution are insured. However, amounts beyond this are not covered, and you are subject to credit risks.
– Spreading Out Accounts: Instead of keeping all your funds in one account, consider opening accounts with different banks. This ensures that you can still access your funds if one bank fails.
– Multiple Accounts: Having multiple accounts can serve as another way to diversify your funds. If a bank fails, you can still access part of your money. Ensure that the accounts belong to separate banks.