The collapse of the Silicon Valley Bank explained in pictures
The collapse of the Silicon Valley Bank on Friday caused the second largest bank collapse in US history.
Here’s how it all collapsed:
As the bank grew to become the 16th largest in America, SVB invested its funds in long-dated bonds when interest rates were near zero.
It seemed like a good idea at the time, but as interest rates rose, the prices of these long-term bonds fell, destroying their investments.
On Wednesday, SVB said it had suffered a $1.8 billion after-tax loss and urgently needed to raise more capital to address depositor concerns.
The market reacted sharply and SVB lost over $160 billion in value in 24 hours.
As the stock fell, depositors moved quickly to withdraw money from the bank.
Banks hold only a fraction of depositors’ money in cash — what’s called a fractional reserve. That meant the SVB couldn’t give depositors their money because it was in the no longer valuable long-term bond investments.
In short, the SVB did not have the necessary cash to meet its obligations to its customers. As the panic retreat continued, a bank run was in full swing.
That’s why the Swiss Federal Deposit Insurance Agency took over the SVB on Friday, giving depositors access to their money until Monday, and because the bank’s troubles pose a major risk to the financial system.
This is the type of action represented by the “FDIC Insured” sign you may have seen at your local bank.
It wasn’t just depositors who removed their assets from the bank.
Bloomberg reports that SVB CEO Greg Becker sold $3.6 million worth of stock in the company less than two weeks before the company announced the extensive losses that led to its demise and that Peter Theil’s start-up fund had withdrawn millions by Thursday morning.
SVB had $209 billion in assets and $175.4 billion in deposits at the time of the collapse, the FDIC said in a statement. Many of SVB’s contributors were technology workers and venture-backed companies.
“That’s why venture capital exists in the first place,” said Calvin Henderson, an investment analyst at Canada’s National Angel Capital Organization. “It offers long-term venture capital that traditional investors cannot provide.”
But in the end it was the government, not investors, that came to the rescue of depositors.
Before the FDIC stepped in, depositors could only access up to $250,000, the insurance limit for their accounts, but several companies had well over that amount in the bank, including popular companies like Roblox and Etsy.
The Federal Reserve, Treasury Department and FDIC said regulators took the unusual step of guaranteeing deposits because SVB posed a major risk to the US economy.
Signature Bank in New York was also shut down on Sunday after its customers began withdrawing cash too quickly. State regulators said they took over the bank to stabilize financial systems. Federal regulators said depositors would get their money from both banks.
The fallout from Silicon Valley Bank’s failure prompted President Joe Biden to address taxpayer concerns at the White House today.
“Americans can have confidence that the banking system is safe,” Biden said at the White House. “Your deposits are there when you need them.”
The ripple effect of the SVB in numbers: How the collapse is affecting other US banks
Featuring: George Petras, Stephen Beard, Elisabeth Buchwald, Francesca Chambers, and Shawn J. Sullivan.