What was Silicon Valley Bank? How SVB, the startup tech sector’s favorite bank, collapsed.

Khaya Himmelman and Matthew Zeitlin

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Silicon Valley Bank, or SVB, collapsed on Friday, sending shock waves through the tech industry, which often turned to SVB for startup lending.

It’s the largest bank collapse since 2008, though its downfall was a classic scenario: SVB was suddenly upside down on its books, investors caught wind, and a run on the bank followed. It didn’t have enough cash to pay its account holders.

Regulators stepped in within hours, putting the Federal Deposit Insurance Corp. in charge of SVB’s assets. Account holders will be able to access insured money on Monday through a new entity. For those who had more than $250,000 in the bank, the maximum FDIC will insure, they may have to wait for SVB to be liquidated to recoup their money, and potentially not all of it. According to its last annual report, the bank had $173 billion in deposits, of which $155 billion were not insured by the FDIC.

What was the SVB?

SVB was an unusual bank in its focus on startups in the tech sector. According to its website, it banked around half of all U.S. venture-backed startups. The bank would work hand in glove with technology companies and venture capital firms, frequently lending companies money after they had raised capital from venture capital firms. This mean working with companies that larger, more conservative banks may have been reluctant to do business with because they didn’t have the assets or cash flow necessary to underwrite a traditional corporate loan. Silicon Valley Bank would work with startups instead based on their ability to raise venture capital.

But it wasn’t this relatively high-risk behavior that got the bank in trouble — or at least not just that. Instead, what blew out a giant hole in its balance sheet was what the bank did with the deposits it got from venture-backed companies: buy long-term bonds. The Federal Reserve’s interest rate hikes meant that the value of these bonds was lower, and as depositors fled, the bank had to recognize large losses as it sold its bond portfolio.

The stakes

The FDIC takes over failing banks in order to protect depositors. The insurance provided by the banking regulator goes up to $250,000. The FDIC transferred all insured deposits from SVB to a new entity, the Deposit Insurance National Bank of Santa Clara (DINB).

Bloomberg reported that according to more recent data, the portion of the bank’s deposits that were uninsured was over 90 percent. Those depositors face an uncertain path.

According to an FDIC news release, uninsured depositors will get a receivership certificate for the remaining amount of their uninsured deposits. “As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors,” the FDIC said in a Friday news release.

These certificates do not necessarily guarantee that they will be paid back for the full amount. This will leave companies scrambling to find money, at least in the short term, to carry on their normal course of business.

The bank’s failure will likely be highly disruptive to any clients who were not able to pull their money out before Friday. That’s because, as a bank that primarily serves businesses, only a small portion of its total deposits were insured by the FDIC.

Most affected is likely a broad range of technology companies and their employees who Silicon Valley Bank aggressively went after for their business. Even companies that didn’t directly bank with Silicon Valley Bank are already feeling the aftershocks of its failure.

Parker Conrad, the founder and chief executive of the payroll and benefits company Rippling, tweeted Friday that “pay runs in flight for today out of SVB have not been paid” and that the company had started switching over its payroll operations from Silicon Valley Bank to JPMorgan Chase on Thursday. “Going forward, payroll runs through Rippling will have no exposure to SVB. But today’s payment delay is a result of pay runs initiated early this week, with funds in-flight through SVB,” Conrad tweeted.

Another technology executive, Alex Meshkin, the CEO of Flow Health, shared a message he had sent the company explaining that because it uses Rippling to process payroll, it wasn’t able to issue some paychecks Friday. “We have MANY employees that live paycheck to paycheck. This devastating. Overdraft fees, etc,” Mishkin tweeted.

There are other banks facing trouble Friday, especially on the West Coast. Shares in First Republic, a bank focused on high-net-worth individuals that is headquartered in San Francisco, were down more than a third this week. Shares of PacWest lost a third of their value on Friday alone.

What led to the bank’s closing?

SVB Financial, the holding company for Silicon Valley Bank, began its spiral into chaos as its shares fell 60 percent on Thursday after it announced a plan of raising $2.25 billion in stock to make up for substantial losses.

While the bank’s customers are largely technology companies, its financial trouble was not exactly tied to loans to those companies going bust. Instead, the bank had invested in long-term bonds in an effort to get higher yield on its assets as deposits flowed into the bank in 2020 and 2021 thanks to the boom in venture capital funding for startups. At the time, interest rates were at historic lows, meaning that in search of yield, investors had to lock up funds for longer. The Federal Reserve starting last year began to relentlessly hike interest rates.

This had two effects on Silicon Valley Bank’s business: One, it affected the bank’s deposit growth, as technology companies were no longer raising money, and so less money was around to be deposited into Silicon Valley Bank. It also meant the bank’s long-term bonds were now worth far less as investors could get similar or higher yields on securities that would mature far faster. It then had to sell these loans at a massive loss to plug the hole left by fleeing depositors.

On Wednesday, the company said that it had sold $21 billion worth of securities and recorded a $1.8 billion loss. Despite this move having been made to shore up its finances, it spooked depositors and led to the bank run that ended in the bank’s failure on Friday.

In the past few days, many prominent venture capital firms, including Founders Fund, Coatue Management and Union Square Ventures, advised their portfolio companies to pull their deposits from the bank, Bloomberg reported.