On Friday, March 10, 2023, the California Department of Financial Protection and Innovation closed down Silicon Valley Bank, and the Federal Deposit Insurance Corporation (FDIC) was appointed as the receiver. This move comes after SVB Financial Group, the parent company of the startup-focused lender, failed to raise enough capital through a stock sale. As of December 31, 2022, Silicon Valley Bank had $209 billion in total assets and $175.4 billion in total deposits.
The FDIC has created the Deposit Insurance National Bank of Santa Clara (DNIB) to protect insured depositors. At the time of closing, the FDIC, as the receiver, immediately transferred all insured deposits of Silicon Valley Bank to the DINB. All insured depositors will have full access to their insured deposits by Monday morning, March 13. The main office and all branches of Silicon Valley Bank will reopen on the same day.
Silicon Valley Bank had 17 branches in California and Massachusetts. Its clients are mostly technology startups. The bank’s troubles began earlier this week when it launched a share sale to raise capital after selling a portfolio consisting mostly of US Treasuries at a loss. The SVB Financial Group announced on Wednesday, March 8, that it was raising $2.25 billion in a share sale in addition to having sold $21 billion worth of securities from its portfolio. The bank also announced that it booked a massive after-tax loss of $1.8 billion on sales of these investments.
This announcement caused solvency fears with the lender and caused a ripple-effect into its customers pulling out deposits. According to a report by the Wall Street Journal, venture-capital investors had advised startups to pull their deposits from SVB. Other large investors, including Peter Thiel’s Founders Fund and Coatue Management, reportedly instructed their portfolio firms to reduce their exposure to SVB.
SVB Financial Group was exploring options, including a sale, before the bank was shut down. Shares of SVB were halted on Friday after tumbling as much as 66% in premarket trading.
The closure of Silicon Valley Bank highlights the risks of investing in technology startups. Silicon Valley Bank was a significant lender to this sector and its closure could have a severe impact on the industry. Many technology startups depend on venture-capital investors for funding, and their deposits in Silicon Valley Bank may have been used to fund loans to other startups. The closure of Silicon Valley Bank could, therefore, lead to a reduction in funding for technology startups and could have a significant impact on the industry’s growth.
The closure of Silicon Valley Bank is also a reminder of the importance of having a robust regulatory framework. The FDIC’s quick action to protect insured depositors will prevent a run on the bank and ensure that insured depositors have access to their funds. The creation of the DINB will also ensure that insured depositors are protected in the future.
In conclusion, the closure of Silicon Valley Bank highlights the risks of investing in technology startups and the importance of having a robust regulatory framework. The closure of Silicon Valley Bank could have a severe impact on the technology startup industry, and its ripple effects could be felt for years to come. The FDIC’s quick action to protect insured depositors will prevent a run on the bank and ensure that insured depositors have access to their funds.