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Why the Silicon Valley Bank failure isn’t looking like a repeat of 2008

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Silicon Valley Bank, a financial institution best known for its ties to fast-growing tech startups and venture capital firms, experienced one of the oldest problems in the banking industry: bank runs, It went bankrupt on Friday.

Its collapse is the largest collapse of a U.S. financial institution since the Washington Mutual collapsed during the financial crisis more than a decade ago.

Some startups with ties to banks rushed to pay their workers and may have to suspend projects or lay off workers until they can access the funding. I was afraid.

California Gov. Gavin Newsom said Saturday that he is in talks with the White House to “stabilize the situation as soon as possible and protect jobs, people’s livelihoods and the entire innovation ecosystem that has served as the tentpole for our economy.” He said he was.

How did that happen? Here’s what you need to know about why banks went bust, who was most affected, and how it might or might not affect the broader banking system in the United States.

why it failed

Silicon Valley Banks have been hit hard by the decline in technology stocks over the past year and the US Federal Reserve’s (Fed) aggressive rate hike plans to combat inflation.

A car is parked outside a Silicon Valley Bank branch in Wellesley, Massachusetts, on Saturday. (Peter Morgan/Associated Press)

Banks have used customer deposits to buy billions of dollars worth of bonds over the past few years, much like a typical bank would normally do. While these investments are generally safe, the value of these investments declined as they paid lower interest rates than comparable bonds would pay if issued in today’s high interest rate environment.

Normally this is not a problem. Because banks hold them for the long term unless they have to sell them in an emergency.

But Silicon Valley’s customers, mostly start-ups and other technology-focused companies, have started needing more cash over the past year. Venture capital funds were drying up and companies were unable to raise additional money for their underperforming ventures, so they had to tap into existing funding. It was often deposited in Silicon Valley banks, which sit at the heart of the tech startup universe.

So Silicon Valley customers started withdrawing their deposits. Initially, it wasn’t a big deal, but it started to require banks to start selling their own assets to meet customer withdrawal requests. Silicon Valley’s customers were mostly corporations and high net worth individuals, and their deposits exceeded his US$250,000 limit for deposit insurance imposed by the U.S. government, so he seemed more afraid of bank failures.

That required selling normally safe bonds at a loss, and those losses piled up, making Silicon Valley banks effectively insolvent. The bank tried to raise additional funds through outside investors, but was unable to find them.

A bank focused on flashy technology went bankrupt by the banking industry’s oldest problem: bank runs.

The front door of a bank in Menlo Park, California.
The entrance of Silicon Valley Bank in Menlo Park, Calif., is seen on Friday. (Michaela Vacheva/Reuters)

Banking regulators had to seize the assets of Silicon Valley banks to protect the remaining assets and deposits of the banks.

San Francisco-based employee performance management firm Confirm.com was among depositors at Silicon Valley banks in a rush to withdraw funds before regulators foreclosed on the bank.

Co-founder David Murray credited an email from one of Confirm’s venture capital investors, which urged the company to withdraw funds “immediately,” citing signs of a bank crackdown. urged to

Such actions accelerated the outflow of cash and led to bank failures.

what happens next?

Two big problems remain for Silicon Valley banks. Both can lead to further problems if not resolved quickly.

The most pressing problem is the large amount of deposits in Silicon Valley banks. The US government guarantees him deposits up to $250,000, but anything over that is considered uninsured. The Federal Deposit Insurance Corporation said insured deposits will be available Monday morning. However, the majority of Silicon Valley Bank’s deposits were uninsured. This is a unique feature of the bank as its clientele is primarily start-ups and wealthy tech workers.

People standing outside the bank.
People stand outside the entrance of Silicon Valley Bank in Santa Clara, Calif., Friday. (Jeff Chiu/Associated Press)

We may not have access to all that money at this time and may need to release it in an orderly process. I can’t wait weeks for it.

Tara Fung, co-founder and CEO of tech startup Co:Create, said her company uses multiple banks besides Silicon Valley Bank and said she could switch to another bank to pay salaries and vendors. said he was able to

Her firm chose a bank as a partner because it’s the “gold standard for technology company-bank partnerships,” and she noted that some people seemed to praise the failure. I was angry.

The second key issue is the lack of buyers for Silicon Valley Bank. Banking regulators usually look for a stronger bank to take over the failed bank’s assets, but in this case, another bank has not moved forward.

A bank acquiring Silicon Valley Bank could go a long way in solving some of the problems related to funding that startups currently have no access to.

Any signs of a 2008 repeat?

No for now, and experts do not believe the problem will spread to the broader banking sector.

Silicon Valley Bank was large, but unique in serving the tech industry and VC-backed companies almost exclusively. I’ve done a lot of work in certain parts of the economy that have been hit hard over the past year.

Other banks are much more diverse across multiple industries, customer bases and geographies. The Federal Reserve’s latest “stress test” of the largest banks and financial institutions showed they could weather a deep recession and a sharp drop in unemployment.

But if the rest of the money can’t be released quickly, it could have economic knock-on effects for the Bay Area and the world of tech startups.

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