How Silicon Valley Bank Collapsed in 36 Hours | WSJ What Went Wrong

Summary

The video outlines the rapid collapse of Silicon Valley Bank (SVB), once the 16th largest bank in the U.S. and a key player in tech banking. After accumulating large deposits during the pandemic, SVB invested heavily in bonds, which lost value as interest rates rose. With dwindling deposits and a massive loss on securities, panic spread, leading to a bank run. SVB was ultimately seized by regulators, marking one of the biggest bank failures in U.S. history. The video explores the impact on startups, the role of deregulation, and the broader banking crisis.

Takeaways

• 💥 Silicon Valley Bank (SVB) was the 16th largest bank in the US and collapsed in just a day and a half.
• 🏦 SVB's collapse was the second largest bank failure in US history and triggered other bank closures and market disruptions.
• 🚀 SVB was founded in 1983 to serve tech companies, eventually supporting nearly half of the nation's venture-backed startups.
• 💼 SVB invested heavily in long-term US treasuries and mortgage securities after being flooded with cash during the pandemic, which would later cause problems.
• 📉 When interest rates rose, SVB's bond investments lost value, creating a $17 billion gap between what it paid for the bonds and their market value.
• 🏃‍♂️ The situation worsened as startups, panicked by a regulatory filing, began withdrawing funds, leading to a run on the bank.
• 🚨 In March 2023, SVB tried to sell securities at a loss to cover a deposit decline, which further spooked investors and triggered a $42 billion withdrawal in one day.
• 🔒 Regulators seized the bank, with the FDIC ensuring insured deposits were protected, but over $151 billion of deposits exceeded the insurance limit.
• 🔎 Some blame the rollback of Dodd-Frank regulations under the Trump administration for SVB's collapse, while others cite the tech sector's risky, fast-moving nature.
• 💬 President Biden and others are calling for stronger banking rules to prevent future failures, while depositors were protected, but shareholders lost everything.

Q & A

What caused the collapse of Silicon Valley Bank (SVB)?

SVB's collapse was triggered by a series of events including rising interest rates, a large investment in bonds that lost value, and a rapid withdrawal of deposits by startups and venture capitalists.

Why was SVB particularly vulnerable to a bank run?

SVB was vulnerable due to its focus on tech startups, which have volatile and 'flighty' deposits. As panic spread, many of these companies quickly withdrew their funds, leading to a liquidity crisis.

How did the Dodd-Frank Act relate to SVB's failure?

The Dodd-Frank Act, introduced after the Great Recession, imposed stricter regulations on banks like SVB. However, during the Trump administration, some of these regulations were rolled back, contributing to a looser regulatory environment for smaller banks, including SVB.

What role did rising interest rates play in SVB's collapse?

Rising interest rates led to a decrease in the value of the bonds SVB had invested in, creating a gap of $17 billion between what they paid for the bonds and their current market value, which contributed to the bank's downfall.

How did the COVID-19 pandemic affect SVB?

During the pandemic, SVB's deposits tripled as businesses increased their deposits. The bank used this influx of cash to buy long-term bonds, which later became a problem as interest rates rose and bond prices fell.

What was the significance of SVB’s large depositors having over $250,000 in their accounts?

Many of SVB’s depositors had over $250,000 in their accounts, which is the FDIC insurance limit. This meant that a large portion of SVB’s deposits were uninsured, adding to the panic when the bank faced trouble.

What actions did the FDIC take after SVB's collapse?

The FDIC took over SVB and assured customers that insured deposits would be available within three days. They also announced that even uninsured deposits over $250,000 would be covered.

What impact did SVB's collapse have on other banks?

SVB’s collapse, along with the failure of Signature Bank shortly after, caused widespread concern about the stability of other banks, particularly those with similar vulnerabilities.

How did investors and startups react when SVB announced its losses?

After SVB announced a $1.8 billion loss from selling securities, panic spread among investors and startups, prompting many to quickly withdraw their funds, which accelerated the bank’s downfall.

What measures did the government take to prevent further bank runs after SVB's collapse?

Regulators announced that all deposits, including those over the $250,000 FDIC insurance limit, would be protected to restore confidence and prevent further runs on other banks.