The Silicon Valley Bank Collapse

The news of SVB collapse has been making rounds within the startup ecosystem. After Washington Mutual Bank in 2008, the collapse of Silicon Valley Bank was the second-largest bank failure in American history. As the 16th largest commercial bank in America, it provided digital and banking services to nearly half of US Venture-backed tech startups and companies.

SVB has profoundly benefited from the boom in tech startups since the end of 2019 and the peak of 2020. It saw its deposits triple from $71m to $220b at the end of March 2020. With the low cost of borrowing, SVB was a safe haven for all startups and investors. What could possibly go wrong?

How did they get here?

It lost 60% value in a single day. SVB failed to diversify its risk portfolio, with increased reliance on US government bonds. However, the investment portfolio was not aligned with the harsh reality that arose in the form of hiking interest rates. For a bank, the rising interest rates should be a sign of an impending loss on an investment that shall be incurred. However, the delayed response and lack of alarm over the changing interest rates resulted in the bank selling some of the securities at a loss. This move by the SVB was a cause of concern for depositors as they scrambled to get ahold of their funds before the bank collapsed. After a run on the deposits, the bank failed on March 10; this jeopardized the tech-focused lenders’ intention to acquire further capital. U.S. regulators responded by taking immediate action, including seizing a second bank three days later, in an effort to allay concerns that depositors may withdraw their funds from other lenders. Amidst the rising financial crunch caused by the high cost of borrowing, a collapse would run its cracks deep in many companies.

What will happen next?

The panic over is the main thing to look out for. The key question is: Will people cease withdrawing money? Are customers and investors being reassured in the way the government wants them to be? How will this affect the funding of women-led startups?

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