Silicon Valley Bank Collapse: What We Know and How It Happened

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On Friday, Silicon Valley Bank, a lender to some of the biggest names in the technology world, became the largest bank to fail since the 2008 financial crisis.

Silicon Valley Bank provided banking services to nearly half of the country’s venture capital-backed technology and life-science companies, according to its website, and to over 2,500 venture capital firms. Its swift collapse has sent shock waves through the tech industry, Wall Street and Washington.

Here’s what we know so far about this developing story and what brought Silicon Valley Bank to this point.

Flush with cash from start-ups, Silicon Valley Bank did what most of its rivals do: It kept a small chunk of its deposits in cash, and it used the rest to buy long-term debt like Treasury bonds. Those investments promised steady, modest returns when interest rates remained low. But they were, it turned out, shortsighted. The bank hadn’t considered what was happening in the broader economy, which was overheated after more than a year of pandemic stimulus.

This meant that Silicon Valley Bank was caught in the lurch when the Federal Reserve, looking to combat rapid inflation, started raising interest rates. Those once-safe investments looked a lot less attractive as newer government bonds kicked off more interest.

In what would ultimately spell trouble for the bank, start-up funding was also starting to dwindle, leading Silicon Valley Bank’s clients — a mixture of technology start-ups and their executives — to begin withdrawing their money. To fulfill its customers requests, the bank had to sell some of its investments at a steep discount.

But not all Silicon Valley Bank’s problems are linked to rising interest rates. The bank was unique in ways that contributed to its rapid demise. The Federal Deposit Insurance Corporation only insures amounts up to $250,000, so anything more than that would not have the same government protection. Silicon Valley Bank had a significant number of big and uninsured depositors — the kind of investors who tend to withdraw their money during signs of turbulence.

Once Silicon Valley revealed its huge loss last Wednesday, the tech industry panicked, and start-ups rushed to pull out their money.

By late last week, Silicon Valley Bank was in free fall. The Federal Deposit Insurance Corporation announced on Friday that it would take over the 40-year-old institution, after the bank and its financial advisers had tried — and failed — to find a buyer to step in. The takeover put about $175 billion in customer deposits under the control of the federal regulator.

The failure of Silicon Valley Bank, based in Santa Clara, Calif., is the largest since the 2008 financial crisis. In the aftermath of that crisis, Congress passed the Dodd-Frank financial-regulatory package, designed to prevent such collapses.

In 2018, President Trump signed a bill that reduced how often regional banks had to submit to stress tests by the Federal Reserve. Last week, as news of Silicon Valley Bank’s failure spread, some banking experts said the Dodd-Frank package might have forced the bank to better handle its interest rate risks had it not been rolled back.

Silicon Valley Bank is small compared with the nation’s largest banks — its $209 billion in assets pales next to the more than $3 trillion at JPMorgan Chase. But bank runs can happen when customers or investors panic and start pulling their deposits. Perhaps the most immediate concern late this week was that the failure of Silicon Valley Bank would scare off customers of other banks.

Shares of both First Republic Bank, which is based in San Francisco, and Signature Bank in New York were down more than 20 percent on Friday. But shares of some of the nation’s largest banks like JPMorgan, Wells Fargo and Citigroup did not suffer the same fate, and even nudged higher on Friday.

Regulators have been rushing to contain the fallout, especially before markets reopen on Monday and the business week begins.

On Sunday, Treasury Secretary Janet L. Yellen said regulators had been working over the weekend to stabilize the bank — and she tried to assure the public that the broader American banking system was “safe and well capitalized.”

At the same time, she acknowledged that many small businesses were counting on funds tied up at the bank.

Ms. Yellen suggested that a possible solution could be an acquisition of Silicon Valley Bank, emphasizing that regulators were trying to address the situation “in a timely way.” According to a person familiar with the matter, the F.D.I.C. on Saturday started an auction for Silicon Valley Bank that was set to wrap up Sunday afternoon.

If that push to find a buyer were to fail, the government would consider safeguarding uninsured deposits at the bank, another person said. But no decision had been made.

While customers with deposits of up to $250,000 — the maximum covered by F.D.I.C. insurance — will be made whole, there’s no guarantee that depositors with larger amounts in their accounts will get all of their money back.

Another idea being circulated involves the F.D.I.C. figuring out a way to pay back all the depositors. Typically, the F.D.I.C. is required to unravel failed banks in the least expensive way possible, which often entails leaving the private sector to shoulder any losses on uninsured deposits. But the F.D.I.C. could get around that requirement by invoking a “systemic risk exception,” which would allow the government to pay back uninsured depositors if not doing so would have dire consequences for the economy or financial stability.

But invoking the exception is not simple: The Treasury secretary, in consultation with the president, the F.D.I.C. and the Federal Reserve Board, must sign off on the decision.