When Silicon Valley Bank went under, immediately followed by crypto bank Signature, it made three mid-sized banks serving the tech sector gone in a week. In this featur for Wiser!, I make sense of what happened, the consequences and implications for the tech economy.
w/Promotion
Meco: the best new app for newsletter reading
Reading newsletters in the inbox is frustrating. It is noisy and easy to lose control of subscriptions.
Now you can enjoy your newsletters outside the inbox with Meco, an app built for reading. Plus it’s completely free.
w/TechRegs
The Tale of Three Banks Called "Si..."
First, it was Silvergate Bank. Then, it was Silicon Valley Bank. And finally, it was Signature Bank. Three banks, all starting with “Si...”, all niche in their space, and all mid-sized banks that focused on servicing the technology and crypto sectors, areas of interest for the Wiser! audience.
Now, all gone in the past week. Of the three banks, it has been Silicon Valley Bank that has drawn most attention and catapulted the story to the top of the mainstream news agenda, fighting for airtime between Gary Lineker and Rupert Murdoch. Many others have written more detailed explanations than I can about what went wrong; three of the better ones are by Marc Rubinstein, Matt Levine, and Noah Smith.
But what I can make sense of for you is, despite all of the complexities and technicalities, the fundamentals of what went wrong are quite straight forward;
- The majority of startups put their cash into Silicon Valley Bank.
- SVB made money with this money by investing it in long term US government bonds and mortgage-backed securities.
- As interest rates started to rise, depositors took out more money than they were putting in.
- To meet demand for cash, SVB started to sell off its investments to raise cash (liquidity).
- BUT, they had to sell them at a loss because interest rates were rising quickly and these long term investments were no longer worth what they were. SVB incurred a loss of $1.8 billion.
- SVB announced they would raise $2 billion from shareholders to fill the gap. This spooked the VCs who had the biggest stakes on the startup’s cash. They withdrew heavily, exacerbating the problem and starting a run on the bank.
- Within 24 hours, it was all over and SVB was taken under the control of the US Gov.
As the bank of choice for crypto, Silvergate Bank's failure is disappointing, but predictable. I warned of Silvergate's risky, if not illegal, activity—and identified severe due diligence failures. Now, customers must be made whole & regulators should step up against crypto risk.
— Elizabeth Warren (@SenWarren) March 8, 2023
To be honest, last Friday I wasn’t so interested in the collapse of Silicon Valley Bank (SVB), the 16th largest bank in the USA and only the 2nd American bank to go bust since Lehmans in 2007. By all accounts, the bank had been technically insolvent for months.
Maybe I should have been given that SVB is/was the bank of choice for tech startups to deposit their cash and provide unique financial service products for startups and entrepreneurs.
