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WHY DID SILICON VALLEY BANK FAIL?

Silicon Valley Bank was hit hard by the downturn in technology stocks over the past year as well as the Federal Reserve’s aggressive plan to increase interest rates to combat inflation.

The bank bought billions of dollars worth of bonds over the past couple of years, using customers’ deposits as a typical bank would normally operate. These investments are typically safe, but the value of those investments fell because they paid lower interest rates than what a comparable bond would pay if issued in today’s higher interest rate environment.

Typically that’s not an issue, because banks hold onto those for a long time — unless they have to sell them in an emergency.

But Silicon Valley’s customers were largely startups and other tech-centric companies that started becoming more needy for cash over the past year. Venture capital funding was drying up, companies were not able to get additional rounds of funding for unprofitable businesses, and therefore had to tap their existing funds — often deposited with Silicon Valley Bank, which sat in the center of the tech startup universe.

So Silicon Valley customers started withdrawing their deposits. Initially that wasn’t a huge issue, but the withdrawals started requiring the bank to start selling its own assets to meet customer withdrawal requests. Because Silicon Valley customers were largely businesses and the wealthy, they likely were more fearful of a bank failure since their deposits were over $250,000, which is the government-imposed limit on deposit insurance.

That required selling typically safe bonds at a loss, and those losses added up to the point that Silicon Valley Bank became effectively insolvent. The bank tried to raise additional capital through outside investors, but was unable to find them.

The fancy tech-focused bank was brought down by the oldest issue in banking: a good ol’ run on the bank. Bank regulators had no other choice but to seize Silicon Valley Bank’s assets to protect the assets and deposits still remaining at the bank.