On Friday morning of March 10, 2023, Silicon Valley Bank (SVB), a startup-focused lender, faced a sudden bank run, which led to its collapse.
Silicon Valley Bank (SVB) was a bank that focused on lending money to start-up companies and venture capital firms. They provided a range of financial services, including loans, credit cards, and lines of credit to startups that were too risky to traditional banks. Because of its focus on innovation and entrepreneurship, the bank quickly gained a reputation as a supportive partner to startups and their founders.
A Bank Run in 48 Hours
When the Federal Reserve’s interest rates were low at nearly zero, SVP invested heavily in longer-term bonds using the deposits from its venture capital clients.
However, as the Federal Reserve raised interest rates to combat inflation, the value of these assets decreased, leading to significant unrealized losses for banks.
This trend was especially hard on the tech industry, as the higher rates resulted in a decline in the value of tech stocks and made it difficult for tech firms to secure funding. Moody’s Chief Economist Mark Zandi has noted that this situation prompted many tech companies to withdraw their deposits from Silicon Valley Bank in order to finance their operations.
When its customer base of tech startups suddenly pulled out their deposits, this left the bank with insufficient liquidity to cover its obligations.
In order to address the sudden surge in withdrawals, SVB announced on Wednesday that they sold securities worth $21 billion at a loss of $1.8 billion and also intended to raise capital by selling its shares.
This triggered panic among venture capitalists who reportedly urged their companies to start withdrawing their funds, which eventually caused the devastating bank run.
By Thursday, the SVB’s stock dropped 60% which prompted the suspension of the trading of its shares.
Effect on the crypto industry
The crypto industry was not spared, as the stable coin USD Coin (USDC), fell about 87 cents overnight when Crypto firm Circle disclosed through its tweet that $3.3 billion of its reserves remain at SVB.
However, Circle is quick to assure the public through its website’s company update announcement that USDC is “100% collateralized with a combination of cash and US Treasuries. 77% of USDC is collateralized with US Treasury Bills and 23% is held at a variety of institutions, which SVB is only one.” In case that SVP may not return 100% of their reserves or may take a longer period of time, Circle declares that the company will use corporate resources or external capital should there be any shortfall.
