Silicon Valley Bank collapse: what the heck happened?

Friday’s collapse of Silicon Valley Bank is the second largest bank failure in United States history, right behind Seattle’s own Washington Mutual in 2008.

U.S. Representative Jeff Jackson (D-North Carolina) posted a video on TikTok explaining what prompted Silicon Valley Bank to implode.

"It lost a lot of money causing a lot of its customers to get scared and try to withdraw their money, and it caused a run on the bank," Jackson said.

"So the federal government through the [Federal Deposit Insurance Corporation] stepped in and closed the bank. Here's the problem: Typically, your deposits in a bank are only protected up to $250,000. But the vast majority of customers at this bank had deposits more than that because this bank specialized in startups and small businesses."

Citing rising interest rates, companies began withdrawing their money from the bank to keep themselves afloat, causing the Silicon Valley Bank to realize it was critically low on operating capital.

On March 8, Silicon Valley Bank began taking steps to acquire more capital, including a massive bond selloff at a loss of $1.8 billion.

The ensuing panic caused venture capitalists and companies alike to start withdrawing their deposits. By the end of March 9, $42 billion had been yanked out of the bank, leaving it with a negative cash balance approaching $1 billion.

On Friday, the state of California stepped in to seize Silicon Valley Bank and put it in Federal Deposit Insurance Corporation receivership. Garry Tan, president and CEO of the California based startup accelerator Y Combinator said that CEOs with money in Silicon Valley Bank were sweating it out over the weekend, wondering if they would be able to pay employees.

“I would guess this affects more than 1,000 startups," he explained. "And about a third of those startups will not be able to make payroll in the next 30 days, in the current configuration.”

And lest you think this is just a Bay Area story — our friends at Geekwire estimated that between 50% to 80% of Seattle startups had money in Silicon Valley Bank. Regulators also closed New York-based Signature Bank on Sunday.

This past weekend was fraught for the startup world, until the feds announced on Monday morning that depositors would be made whole, even beyond the Federal Deposit Insurance Corporation insurance limit of $250,000.

President Biden asked everybody to simmer down.

"No losses will be borne by the taxpayers," he said. "I'm gonna repeat that: No losses will be borne by the taxpayers."

Biden also added that it's time to start revisiting those regulations that have been loosened up in recent years.

"I'm going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely this kind of bank failure would happen again."

Soundside host Libby Denkmann sat down with Joe Phillips, dean of Seattle University's Albers School of Business and Economics to figure out exactly what happened.

As Phillips explained, the unique nature of the business Silicon Valley Bank was engaged in only exacerbated the issues.

"The thing that's interesting about Silicon Valley is the nature of the deposits," he said. "So it's not like your typical bank — it doesn't have a lot of mom and pop deposits with $5,000 or $10,000 in their checking account. It's got checking accounts with millions and hundreds of thousands of dollars in it."

So as investors and companies started making the run on the bank, pulling out all of those deposits, the bank quickly ran out of operating capital.

However, Phillips said that this collapse is nowhere near what happened with Washington Mutual back in 2008.

"I'd say there's no comparison — this is not a systemic problem," he said. "Back in the day with WAMU, the problem was with the underlying value of a lot of the assets, the loans that they were holding."

Phillips also noted that the covering of deposits by the federal government is not exactly like the "bailouts" of the 2008 financial crisis.

"Who is not getting bailed out? Here it's the management of the bank, because they lost their jobs. The shareholders are not getting bailed out, because they're taking a loss," he said.

The other big question emerging from Silicon Valley Bank’s collapse is will Congress act to head off future problems for mid-sized banks?

Are those Dodd-Frank stress tests coming back? Rep. Jackson said congressmembers were summoned late Sunday night.

"Here was an emergency zoom call with several hundred members of Congress, [that] was convened by the Treasury Department. There's going to be a huge political debate now about bank regulation and how much risk we're willing to let them take going forward," he said. "Good. Clearly we have to make some changes, but today is about not sinking the boat that we are all in."

You can listen to then entire conversation by clicking the link above.