Silicon Valley Bank Collapses in Biggest Failure Since Great Recession

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A run on deposits leads to a bank failure, and all banking customers need to pay attention. 

Silicon Valley Bank was founded in 1983 and became one of the leading financial institutions used by technology and biotech companies as well as many other startups. The bank had approximately $175 billion of deposits as of the end of last year.

On Friday, it collapsed, and the Federal Deposit Insurance Corp. (FDIC) took control of its assets. The collapse occurred after a run on the bank, with many tech companies withdrawing their money after being advised to do so by venture capital firms.

Silicon Valley Bank had $209 billion in assets, making it the largest bank to fail since the Great Recession in 2008 (which took down Washington Mutual). Here’s what this means for customers of both this bank and other financial institutions.

Why Silicon Valley Bank collapsed

The collapse of Silicon Valley Bank seemed to happen quickly, occurring just two days after the financial institution took emergency measures to raise money and prevent this outcome. A recent run on the bank amidst financial concerns was the immediate driver of its downfall, but there were many factors leading up to the bank’s demise.

Issues include relaxed lending standards, high interest rates paid on deposits, and the bank’s practice of investing a substantial amount of its deposited funds.

The bank had invested heavily in Treasury and mortgage bonds when interest rates were low, which then had to be sold at a substantial loss of around $2 billion after the Federal Reserve raised rates. This made SVB’s investments less attractive and affected the market for start-up funding, causing bank customers to make the withdrawals that necessitated the asset sales at an inopportune time.

What this means for customers

On Friday, Silicon Valley Bank was closed by California regulators and put under the control of the FDIC, which is acting as a receiver. The FDIC subsequently transferred the bank’s assets to a new entity, National Bank of Santa Clara, which the agency has indicated will be operational starting Monday.

For customers who had account balances below the FDIC insured limits of $250,000 per depositor, per insured bank, there should be no financial loss. In fact, the FDIC said the new institution would continue to clear checks that were issued by Silicon Valley Bank and insured depositors could access their money as early as Monday, March 13, 2023.

However, if customers had accounts with funds above the FDIC limit, they would be provided with receivership certificates for uninsured funds. They cannot just withdraw all their money at this point, but will have first claim on funds that are recovered from Silicon Valley Bank. Uninsured depositors will receive an advance dividend in the upcoming week and as the FDIC sells the bank’s assets, uninsured depositors may receive future dividend payments from the proceeds.

This bank collapse will obviously have the most profound impact on customers of Silicon Valley Bank who had accounts above FDIC limits. But, the reverberations of it may impact others who do their banking elsewhere, too.

Shares of several other banks fell more than 20% in trading on Friday. And Treasury Secretary Janet Yellen also suggested that the risk of bank failure could be more widespread, testifying at a Ways and Means Committee Hearing on Friday that, “There are recent developments that concern a few banks that I’m monitoring very carefully and when banks experience financial losses, it is and should be a matter of concern”

Ultimately, the collapse is an important reminder that any financial institution — even massive banks — could potentially go down if the conditions are right. This is why it is important to choose an FDIC-insured account and to think carefully before making deposits in any one account that exceeds FDIC-insured limits.

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