The 16th largest bank in the United States was Silicon Valley Bank (SVB) until a few months ago. The bank held about $209 billion in assets in December 2022 but collapsed in less than a year (Gobler, 2023). SVB provides services to companies at any stage, and the bank is commonly known for helping start-up and venture-backed companies in the technology industry (Gobler, 2023). In 2022, 44% of venture-backed firms in the technology and healthcare industry made their initial public offerings (IPOs) in SVB (Gobler, 2023). These tech start-ups prioritize the rapid growth of the company, change strategies regularly, and view their failures as opportunities (Griffith et al., 2023). Hence, their operations depend on tight connections between money, employees, creators, and service providers (Griffith et al., 2023). Due to the irrationality of these companies’ functions, most commercial banks prefer to avoid providing services for them, yet SVB discovered unique ways to serve these start-ups (Griffith et al., 2023).
SVB experienced dramatic growth between 2019 and 2022, which generated significant number of assets and deposits for the bank (Gobler, 2023). Among those assets, small amount was held in cash, most of the extra money were in Treasury bonds and long-term debts with low risk and return (Gobler, 2023). The Federal Reserve increases the interest rate because of high inflation, making these investments riskier than before (Gobler, 2023). Investors could purchase a bond with a higher interest rate resulting in a decreasing trend of SVB’ s bond value (Gobler, 2023). Then, as SVB focuses on providing services for businesses in the tech industry, the bank seeks problems when their clients’ funding shrinks (Giang, 2023). The clients start to tap their accounts more frequently (Giang, 2023). Many customers of SVB were great, uninsured depositors tend to withdraw money when sensing turbulence. The bank had to sell its investment at great discount to satisfy customers’ demand (Giang, 2023). As a result, SVB lost $1.8 billion, indicating the destruction of the bank (Gobler, 2023).
After SVB collapsed, the Federal Deposit Insurance Corporation (FDIC) guaranteed depositors up to $250,000 for each account category (Gobler, 2023). In other words, if the depositors had $250,000 in the Silicon Valley Bank account, they could receive all money in their accounts (Gobler, 2023). Unfortunately, most SVB clients had more than $250,000 in their accounts, which indicates the money exceeded was uninsured, and they would lose most of their funds due to the bank collapse (Gobler, 2023). To resolve this issue, the Federal Reserve declared that it would adopt a systemic risk exception on March 12, indicating all depositors would receive financial compensation despite the deposit insurance (Gobler, 2023). For investors and shareholders, FDIC cannot protect them from losses as they did to depositors. Individuals and corporations that held stock in SVB Financial Group will not be refunded (Gobler, 2023).
On March 27, 2023, First Citizens Bank and Trust Company announced that they reached an agreement with FDIC on purchasing the receivership of SVB from them, including all loans and other assets (“First Citizens Bank”, 2023). First Citizens was chosen to complete this bank-wide purchase through competitive bidding (“First Citizens Bank”, 2023). This transaction assured First Citizens Bank’s promise to SVB depositors and investors and maintained its solid financial position (“First Citizens Bank”, 2023). This purchase also allowed the bank to develop services connected to the innovation hub on SVB’s strength in serving the private equity, venture capital, and technology industries (“First Citizens Bank”, 2023). First Citizens Bank would keep protecting its clients and investors despite the market situation and economic cycles through risk management (“First Citizens Bank”, 2023).
Giang, V. (2023, March 15). Banking Turmoil: What We Know. The New York Times. Retrieved May 6, 2023, from https://www.nytimes.com/article/svb-silicon-valley-bank-explainer.html
Gobler, E. (2023, May 1). What Happened to Silicon Valley Bank? Investopedia. Retrieved May 6, 2023, from https://www.investopedia.com/what-happened-to-silicon-valley-bank-7368676
Griffith, E., Issac, M., & Frenkel, S. (2023, March 17). Mortgages, Wine and Renovations: Silicon Valley Bank’s Deep Tech Ties. The New York Times. Retrieved May 6, 2023, from https://www.nytimes.com/2023/03/17/technology/svb-tech-start-ups.html
First Citizens Bank Enters into Whole Bank Purchase of Silicon Valley Bridge Bank, N.A. (2023, March 27). FirstCitizensBank. Retrieved May 8, 2023, from https://newsroom.firstcitizens.com/2023-03-27-First-Citizens-Bank-Enters-into-Whole-Bank-Purchase-of-Silicon-Valley-Bridge-Bank,-N-A