Explained | What caused Silicon Valley Bank's failure? Premium
The Hindu
The sudden collapse of Silicon Valley Bank sent shockwaves through the startup community, which has come to view the lender as a source of reliable capital, particularly for some of tech’s biggest moonshots
On March 10, 2023 U.S. banking regulators closed the SVB Financial Group, putting the tech-heavy lender into receivership, moving quickly to protect depositors as a crisis rippled through global markets and hit banking stocks.
The sudden collapse of Silicon Valley Bank sent shockwaves through the startup community, which has come to view the lender as a source of reliable capital, particularly for some of tech’s biggest moonshots.
The bank was seeking a sale, sources told Reuters, and trading in its shares was halted after they plummeted 60% late Thursday. SVB Financial Group Inc's shutdown and takeover by banking regulators on Friday can be traced to the U.S. Federal Reserve raising interest rates and souring the risk appetite of investors.
The bank has been central to the formation of many early stage companies due to its reputation for taking bets on startups that may have had little chance of survival otherwise and for which larger banks may find far too risky. It has had financial relationships with a who’s who of Silicon Valley firms over the years, including Snapchat’s parent Snap Inc
Here is the sequence of events that led to Silicon Valley Bank's failure:
The Federal Reserve has been raising interest rates from their record-low levels since last year in its bid to fight inflation. Investors have less appetite for risk when the money available to them becomes expensive due to the higher rates. This weighed on technology startups — the primary clients of Silicon Valley Bank — because it made their investors more risk-averse.
As higher interest rates caused the market for initial public offerings to shut down for many startups and made private fundraising more costly, some Silicon Valley Bank clients started pulling money out to meet their liquidity needs. This culminated in Silicon Valley Bank looking for ways this week to meet its customers' withdrawals.