Silicon Valley Bank (SVB) was one of the largest and most influential banks in the US tech sector, providing banking services to nearly half of all US venture-backed technology and life science companies. It also had operations in several other countries, including Canada, China, Denmark, Germany, Ireland, Israel, Sweden and the UK.
However, on March 10th 2023, SVB collapsed with astounding speed after suffering massive losses from its exposure to risky loans and investments. The US Federal Deposit Insurance Corporation (FDIC) took over SVB and guaranteed its deposits up to $250,000 per account. The FDIC also shut down Signature Bank, another regional bank that was teetering on the brink of collapse.
SVB’s former parent company, SVB Financial Group (SVBF), filed for Chapter 11 bankruptcy protection on March 17th 2023. SVBF owned other businesses aside from SVB, such as venture capital firm SVB Capital and broker-dealer firm SVB Securities. These businesses were not included in the FDIC’s takeover or the bankruptcy filing and will remain operational.
The impact of SVB’s failure is still unfolding across global financial markets. Here are some of the potential consequences:
Losses for creditors and shareholders:
According to its bankruptcy filing, SVBF had total assets of $86 billion and total liabilities of $84 billion as of December 31st 2022. However, these numbers may not reflect the true value of its assets and liabilities after accounting for impairments and write-downs. Creditors and shareholders of SVBF may face significant losses as they compete for a share of its remaining assets in the bankruptcy process. Some of the largest creditors include Credit Suisse ($4 billion), JPMorgan Chase ($3 billion), Wells Fargo ($2 billion) and Bank of America ($1 billion). Some of the largest shareholders include BlackRock (7%), Vanguard (6%), State Street (4%) and Fidelity (3%).
Disruption for tech startups:
SVB was a key source of funding and banking services for thousands of tech startups across various sectors such as biotechnology, software, fintech, e-commerce and cybersecurity. Many startups relied on SVB for loans, lines of credit, deposit accounts, treasury management services and foreign exchange services. With SVB gone or under FDIC control, these startups may face difficulties accessing capital or managing their cash flow. They may also face higher costs or lower quality services from alternative providers.
Ripple effects for venture capital:
SVB was also a major player in the venture capital industry, providing financing solutions such as equity investments, fund-of-funds investments, direct secondary transactions and co-investments to hundreds of venture capital firms and their portfolio companies. Through its subsidiary SVB Capital, it managed over $9 billion in assets across various funds focused on early-stage technology companies. With SVBF in bankruptcy, these funds may face challenges raising new capital or exiting their existing investments.
Contagion risk for other banks:
The collapse of SVB has raised concerns about the stability and solvency of other banks that have similar business models or exposures to risky loans or investments. Signature Bank was one example that succumbed to similar pressures as SVB. Other banks that could be vulnerable include First Republic Bank ($147 billion in assets), City National Bank ($86 billion in assets) and East West Bank ($54 billion in assets). These banks have significant exposure to commercial real estate loans, which have been hit hard by the pandemic-induced recession.
Regulatory scrutiny for banking sector:
The failure of SVB has also triggered regulatory scrutiny for the banking sector as a whole. The FDIC has launched an investigation into how SVB became insolvent so quickly despite passing its annual stress tests last year. The Federal Reserve has announced that it will conduct a comprehensive review of its supervisory framework for large banks with complex activities. The Securities and Exchange Commission has issued subpoenas to several former executives and board members of SVBF regarding possible accounting fraud or insider trading violations.
The impact of Silicon Valley Bank’s bankruptcy is likely to be felt for months or years to come by various stakeholders across different sectors.
