Banking
April 6, 2023

How a Perfect Storm of Deposits, Bonds, and Burning Cash Led to the Collapse of Silicon Valley Bank

How a Perfect Storm of Deposits, Bonds, and Burning Cash Led to the Collapse of Silicon Valley Bank
Banking
April 6, 2023

How a Perfect Storm of Deposits, Bonds, and Burning Cash Led to the Collapse of Silicon Valley Bank

Ignacio Gassó
Co-founder & Chief Operation Officer
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Silicon Valley Bank (SVB) is a commercial bank that provides financial services to startup companies, venture capital firms, and other technology-focused businesses. In 2020, during the venture boom, SVB experienced a massive influx of deposits, reaching $100 billion in 2020, up from $50 billion in 2018, and eventually reaching $190 billion in 2021. This influx of deposits was a boon for the bank, but it also presented a challenge: SVB couldn't lend out these deposits quickly or responsibly enough, so they decided to park a large portion of them in long-term government bonds at a fixed interest rate of 1.5%.

The problem with this decision was that the bonds were long-term, and when the Federal Reserve started increasing interest rates to stave off inflation, the value of the bond portfolio dropped, resulting in an unrealized loss on the bank's balance sheet. This wasn't necessarily a problem, as the bank could wait for the bonds to mature and get paid back more than they invested. However, during this time, startups were burning through cash at a faster rate than ever before, which created a perfect storm for SVB. As the deposits started to drop and the bank's cash balance dwindled, SVB found itself in a position where it had to liquidate its bond position, realizing the loss.

The situation was further complicated by the hyper-connected ecosystem of Silicon Valley. As news of the bank's loss spread, panic set in among its clients, causing a catastrophic run on the bank. To make matters worse, the bank's competitors were quick to take advantage of the situation, offering better rates and services to attract SVB's customers. In an effort to shore up its finances, SVB turned to private markets, raising capital from General Atlantic and other investors.

The situation at SVB serves as a cautionary tale for banks and startups alike. It underscores the importance of responsible lending practices and the need for startups to manage their cash flow more effectively. For banks, it highlights the risks of relying too heavily on long-term investments, especially in a volatile market. The incident also highlights the power of interconnected networks in the tech industry and the potential for a single event to trigger a domino effect. Ultimately, the situation at SVB serves as a reminder that no financial institution is immune to risk, and all must remain vigilant in managing it effectively.

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