Silicon Valley Bank Collapse: How It Happened

On Wednesday, Silicon Valley Bank was a well capitalized institution looking to make money some capital.

Within 48 hours, a panic sparked by the venture capital community that SVB had served and nurtured ended the bank’s 40-year run.

Regulators shut down the SVB on Friday, confiscating its deposits in the biggest US banking meltdown since the 2008 financial crisis and the second-biggest on record. The company’s downward spiral began late Wednesday when it surprised investors with the news that it had to raise $2.25 billion to shore up its balance sheet. What followed was the rapid collapse of a highly respected bank that had grown with its technology clients.

Even as the dust begins to settle over the second bank resolution announced this week, members of the VC community bemoan the role other investors played in SVB’s demise.

“This was a VC-induced, hysteria-induced bank run,” Ryan Falvey, a fintech investor at Restive Ventures, told CNBC. “This will go down in history as one of the ultimate instances of an industry cutting its nose in defiance.”

The episode is the latest in the Federal Reserve’s move to curb inflation, with its most aggressive hike in interest rates in four decades. The impact could be far-reaching given concerns that start-ups might be unable to pay employees in the days ahead, venture investors might struggle to raise funds and an already battered sector could face deeper malaise .

The roots of the SVB collapse stem from dislocations triggered by higher interest rates. As start-up clients withdrew deposits to keep their companies afloat in a cold environment for IPOs and private fundraising, SVB was short on cash. It was forced to sell all of its bonds for sale at a loss of $1.8 billion, the bank said late Wednesday.

The sudden need for fresh capital following the collapse of crypto-focused Silvergate Bank sparked another wave of deposit withdrawals on Thursday as VCs directed their portfolio companies to move funds, according to people familiar with the matter. The concern: A bank run on SVB could pose an existential threat to startups unable to tap into their deposits.

SVB customers said they did not gain confidence after CEO Greg Becker told them to “keep calm” in a call that began Thursday afternoon and the stock’s slide continued unabated, reaching the end of the regular Trade 60%. Importantly, Becker failed to reassure listeners that the capital raise would be the bank’s last, one person said on the conference call.

All told, customers had withdrawn a staggering $42 billion in deposits by the end of Thursday, according to a California report regulatory filing.

As of close of business that day, SVB had negative cash on hand of $958 million, according to the filing, and failed to raise sufficient collateral from other sources, the regulator said.

Falvey, a former SVB employee who launched his own fund in 2018, pointed to the strong interconnectedness of the tech investment community as a key reason for the bank’s sudden demise.

Prominent funds, including Union Square Ventures and Coatue Management, have been emailing their entire roster of startups in recent days, ordering them to withdraw funds from the SVB over bank run concerns. Social media only increased the panic, he noted.

“When you say, ‘Hey, get your deposits out, this thing’s going to fail,’ that’s like roaring fire in a crowded theater,” Falvey said, “It’s a self-fulfilling prophecy.”

Another venture investor, TSVC partner Spencer Greenalso criticized investors who were “factually wrong” about SVB’s position.

“It seems to me that there wasn’t a liquidity issue until a few VCs called it up,” Greene said. “They were irresponsible, and then it became self-fulfillment.”

On Thursday evening, some SVB customers received emails reassuring them that it was “business as usual” at the bank.

“I’m sure you’ve heard some talk about SVB in the markets today so wanted to reach out to give some context,” an SVB banker wrote to a client, according to a copy provided to CNBC became.

“Everything is going as usual at SVB,” wrote the banker. “Understandably, there may be questions and I would like to make myself available if you have any concerns.”

The bank followed suit until Friday, when SVB shares fell further Attempts to sell shares have been abandoned, reported CNBC’s David Faber. Instead, they are looking for a buyer, he reported. But the flight of the deposits made the sales process more difficult, and this attempt also failed, said Faber.

Falvey, who started his career at Wells Fargo and consulted for a bank seized during the financial crisis, its analysis told the SVB mid-quarter To update from Wednesday gave him confidence. The bank is well capitalized and can make all depositors healthy, he said. He even advised his portfolio companies to keep their funds with SVB when rumors began to circulate.

Thanks to the bank run that ended with SVB’s garnishment, those who stayed with SVB now face an uncertain timetable to recover their money. While insured deposits are expected to be available as early as Monday, the lion’s share of deposits held by SVB were uninsured and it’s unclear when they will be released.

“The hasty withdrawal of deposits has resulted in the bank being unable to pay its obligations as they come due,” the California Financial Services Authority said. “The bank is now insolvent.”