Silicon Valley Bank was once the go-to bank for the venture capital and tech sectors. However, its rapid growth from 2019 to late 2022 led to its eventual failure. In this article, we'll take a closer look at what went wrong and where Silicon Valley Bank's customers went.

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Background on Silicon Valley Bank's Growth

During and after the pandemic, VC and tech companies raised an extraordinary amount of money to invest in and to run young companies. Much of that money ended up at Silicon Valley Bank. The bank took the deposits it received and bought traditionally secure US Treasuries and Government Mortgage backed securities (MBS) in an effort to be conservative.

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Effects of Rising Interest Rates

As interest rates rose, several things started to happen that sewed the seeds of Silicon Valley Bank's eventual failure. Venture-backed companies had a much harder time raising money in a higher interest rate world, so they started to spend down the money they'd deposited at Silicon Valley Bank. But, even more critical was the effect that higher interest rates had on the value of those very safe and secure investments in US Treasuries and MBS.

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Forced Selling of Treasuries

Silicon Valley Bank needed the cash to pay their depositors who were taking money out. Some depositors started to get worried about this problem, and feared the bank might be headed for trouble, so they pulled all their money out. Also, some depositors realized that with higher interest rates, they could get a much better return by pulling their money out and then buying treasuries. It didn't take long before a vicious cycle started, and Silicon Valley Bank desperately needed to raise money to fill the holes left when they sold their treasuries at a loss.

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Attempts to Shore Up Balance Sheet

The bank attempted a large stock sale to shore up their balance sheet, but by then a classic bank panic was underway. The stock got crushed, and things unraveled quickly once many famous VC investors told their VC-backed companies to pull their money out of the bank. Essentially, kerosene had been added to the fire that was already burning, and the bank was overwhelmed with depositors looking to get their money out. Collapse was inevitable.

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FDIC Takes Over Silicon Valley Bank

The FDIC, the Federal Deposit Insurance Corporation, which insures depositors in American banks up to $250,000, stepped in and took over Silicon Valley Bank. Any depositor with a balance of the FDIC-insured amount of $250,000 or less will have access to that money on Monday, but unfortunately that's just a small percentage of Silicon Valley Bank's customers. The vast majority of depositors had far bigger deposits, and the fate of that money (and those companies) is now uncertain. They should be able to get some of their money back, but it's unclear when and how much they'll be able to recover.

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Where Did Silicon Valley Bank's Customers Go?

So where did Silicon Valley Bank's customers go, exactly? We don't know yet, but the most likely place is JP Morgan. JP Morgan is the largest and safest bank in the US. There are 8 banks in the US identified as SIBs (Systemically Important Banks). These are banks that are considered "too big to fail." They're subject to greater scrutiny and regulation to ensure their structure is sound. JPM is the biggest of these and considered the safest banking institution in the US.

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Conclusion

The failure of Silicon Valley Bank is a cautionary tale for all banks and investors. It's essential to diversify investments and remain vigilant, even in seemingly secure investments like US Treasuries and MBS.

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