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Why Everyone is Talking About What went wrong at Silicon Valley Bank?

Updated: Apr 17, 2023

Silicon Valley Bank (SVB) was one of the most prominent and influential banks in the US innovation ecosystem, serving nearly half of all venture-backed technology and life science companies. However, on March 10, 2023, the bank collapsed in a spectacular fashion, triggering a federal takeover and a global market turmoil. How did this happen and what are the implications for the future of banking and innovation?

The main cause of SVB's downfall was its overexposure to risky loans and investments in the tech sector, which suffered a severe downturn in 2023 due to regulatory crackdowns, antitrust lawsuits, cybersecurity breaches, consumer backlash and increased competition. SVB had lent billions of dollars to startups and venture funds that were either unprofitable, overvalued or facing legal challenges. Many of these loans were collateralized by shares of private companies that had no liquid market and were difficult to value.

When the tech bubble burst, SVB faced a wave of defaults and write-downs that eroded its capital base and liquidity position. The bank also faced a run on deposits as customers panicked and withdrew their money, fearing for the safety of their funds. The bank's attempts to raise capital from private investors failed, as no one was willing to invest in a sinking ship. The bank's stock price plunged by more than 90% in a matter of days, wiping out billions of dollars in shareholder value.

On March 10, 2023, the Federal Deposit Insurance Corporation (FDIC) announced that it had taken over SVB and sold its assets and liabilities to Wells Fargo (WFC.N), one of the largest US banks. The FDIC also guaranteed all deposits at SVB up to $250,000 per account, ensuring that no customer would lose money as a result of the bank's failure. The FDIC said that the cost of the SVB bailout would be borne by its insurance fund, which is funded by premiums paid by other banks.

The collapse of SVB sent shockwaves across the global financial system, as investors feared that other banks could face similar problems. The US stock market dropped by more than 10% in a week, while bond yields spiked as investors demanded higher returns for lending money. The tech sector was hit especially hard, as many startups and venture funds lost access to funding and faced valuation pressures. Some analysts predicted that the SVB collapse could mark the end of an era of innovation and growth in the tech industry.

However, others argued that the SVB collapse could also create opportunities for new players and business models to emerge in the banking and tech sectors. Some smaller and more nimble banks could fill the gap left by SVB and offer more customized and diversified services to startups and venture funds. Some startups and venture funds could also seek alternative sources of funding, such as crowdfunding, crypto assets or foreign investors. Some tech companies could also benefit from lower valuations and less competition, as they focus on profitability and sustainability rather than growth at all costs.

The SVB collapse is a reminder of the risks and rewards of banking and innovation in a dynamic and uncertain environment. It also shows the importance of regulation, supervision and diversification in ensuring financial stability and resilience. The future of banking and innovation will depend on how well these lessons are learned and applied by all stakeholders involved.

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