There has not been a more enormous bank failure in the United States than in Silicon Valley Banks in 2008. SVB was well-valued by the tech industry, which had a sizable presence in the San Francisco Bay Area before it became notorious for its disastrous collapse.
Assistant Professor at San José State University Matthew Faulkner remarked on how the bank’s failure had a far-reaching effect on the community. In a straight line, it would take around 10 miles to get from the bank’s Santa Clara offices to the school.
“We’re in the middle of it. You could feel the mania and the panic and the concern and the interest. It’s not uncommon to know somebody, whether you or somebody has money there, or whether their company has money there,” Faulkner told NPR. He teaches in the university’s accounting and finance department.
Silicon Valley Bank was not a household name outside Silicon Valley and the tech industry. Its clientele comprised venture capital firms, entrepreneurs, and well-to-do tech professionals.
The SVB Group, which had been in business for almost four decades and was able to compete successfully with larger financial institutions, recently went bankrupt. Included below is some background information about the bank that has since closed.
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Silicon Valley Bank as a “Trailblazer”
According to the bank’s history from 2003, Silicon Valley Bank was founded in 1983 after being conceived by Bill Biggerstaff and Robert Medearis over a poker game. The founders’ original intention was to fill a need for banking services among Silicon Valley’s tech startups. It was established in San Jose initially.
Faulkner referred to the bank as a “trailblazer” for its innovative use of technology. Nasdaq stock trading for the company started in 1987. A year later, it completed its IPO and raised $6 million in equity.
The bank first opened a branch in Silicon Valley, and then in 1990, it opened an office in Massachusetts, on the East Coast. The 1990s saw the rapid expansion of the company’s office network across the United States.
According to The New York Times, in 2015, SVB narrowly avoided disaster after investing in young technology startups during the dot-com bubble of the ’90s. SVB’s stock dropped more than 50% in 2001.
SVB opened an Israel office in 2008, a U.K. branch, and a joint venture in China in 2012, according to the bank’s timeline. In the past decade, additional units opened in Europe and Canada. It expanded to capitalize on the ties between the tech community’s apparent love for California wine.
Then-SVB executive vice president Rob McMillan and SVB CEO Greg Becker told The Street in 2015 that the bank’s wine business was critical to growing its brand and connecting to Silicon Valley entrepreneurs.
That year, SVB’s wine practice “accounted for 6% of the bank’s $14.6 billion total loan portfolio,” the website reported.
The regulatory bodies estimated that SVB had $209 billion in assets and $175 billion in deposits as of December 31st, 2022. Around that period, SVB boasted on its website that “44% of U.S. venture-backed technology and healthcare IPOs bank with SVB.”
It was among the top 20 largest banks in the country, but “you didn’t always think of it as a bank in the way you would think of a Wells Fargo or Chase,” Faulkner said.
“There was a special expertise around Silicon Valley Bank. A lot of banks may not have participated with [startups and tech companies] the same way Silicon Valley Bank did.”
Commercial loan applicants are typically asked by banks about their cash flow and collateral, according to Metrick. He said-
“That’s a challenge, though, if you are a young company that’s not yet cashflow positive and you need, at the very least, banking services. You want somebody to handle your payroll, and be willing to extend you at least small lines of credit, things like that.”
SVB took the risk when no one else would. The San Francisco Gate referred to it as “not your standard lending institution” in a 1995 article.
“While most commercial banks prefer proven clients, SVB likes to cement relationships with companies when they are economic toddlers,” the article says. “It has built strong relationships with the venture capital community.”
Metrick remarked that SVB stood out because of its trusted relationships with startups, VCs, and entrepreneurs. In the long run, he explained that those connections meant additional referrals for others trying to launch their own startups or grow their private banking businesses among affluent clientele.
As a “higher than your normal bank,” Faulkner described SVB’s 90%+ depositors with over $250,000 in assets. Hence, the vast majority of customer deposits were not protected by FDIC insurance.
Metrick said-
“This bank would seem perfectly at home in the 1920s or the 1870s: Lots of deposits and many local customers.”
“The biggest banks have much more diversified client bases and somewhat more diversified funding sources. So it wouldn’t be as funded as much by deposits.”
As The Indicator From Planet Money detailed, this trend accelerated in 2020, right around the pandemic. As SVB put its extra billions in long-term Treasury bonds, the Federal Reserve hiked interest rates, negatively impacting their value.
Additionally, many depositors withdrew their funds as the recent tech industry downturn discouraged them. As a result of a run on the bank, SVB claimed last week that it had to sell $1.8 billion worth of bonds at a loss. Federal authorities seized control of the financial institution. “It’s very much a shame that that bank is gone,” said Faulkner.
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