A blow-by-blow account of how and why SVB collapsed

SVB is a bank that specializes in funding tech companies and start-ups. Between 2019 - 2021, their deposits tripled considering the funding bull run - from?$60 bn?to?$189 bn.

When you deposit money into any bank, they deploy it into investments. So say you deposit $1000, and the bank pays you $1/yr to keep it there. The bank invests that $1000 in hopes of making $5. They give you your $1 interest and keep the other $4. This is the ideal scenario. Then a bunch of things happened.

SVB put their investments into mortgage-backed securities, which gave a return of 1.5%. When the interest rates were low, it was fine. (These are the same financial investments which were at the centre of the 2008 financial crisis.)

Then the following things happened in quick succession:

• The US Federal Reserve raised interest rates, which made it more expensive for investors to borrow money.
• Overall startup funding scene slowed down because of that (hence many layoffs have been happening recently)
• So more startups started taking money than depositing.?
• To give this money to its clients - startups, Silicon Valley Bank sold those investments.

But the bank had made these investments when interest rates were lower but had to sell them when interest rates were higher, which caused the bank to lose almost $2 bn.?

??The Downfall?

The stock fell rapidly; as a result, more startups started to withdraw money in a panic since existing investors suggested so. That depleted the bank's reserves even faster.?

Ironically, Forbes America featured Silicon Valley Bank in their best banks list a few days back and was named in their inaugural financial all-stars list.?

SVB tried to raise more money, but they failed to do so. Eventually, the bank had to shut down and be taken over by banking regulators. This could be the second-largest banking collapse after the Lehman brothers.?????

Garry Tan - CEO of YCombinator, called this “an extinction-level event for startups”.??

When events like this happen, either the bank is taken over by a larger bank, or congress bails out the bank with taxpayers’ money. Considering the scale of this crisis, it will not be allowed to fail. This week is highly crucial for the future of multiple startups. Today is the most important Monday in startup history.?

UPDATE (as of 8.30 am, 13 Mar): The regulators have closed another bank, Signature bank. The govt announced that the SVB deposits would be safe and money would be available from Monday. This is a huge relief, and as some prominent VCs have said on Twitter - the market should determine your startup's success, not your banking partner.?

The collapse of Silicon Valley Bank or SVB has sent shock waves through the markets, raising questions about whether this is reminiscent of the 2008 financial crisis.