Silicon Valley Bank Collapse: How It Happened

On Wednesday, Silicon Valley Bank was a well-capitalized institution that wanted to raise some capital.

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

Regulators stopped SVB Friday, seizing their deposits in the largest US bank failure since the 2008 financial crisis and the second largest ever. The company’s downward spiral began late Wednesday, when it surprised investors with news that it needed to raise 2.25 billion dollars to strengthen its balance sheet. What followed was the rapid collapse of a highly respected bank that had grown alongside its technology clients.

Even now, as the dust begins to settle on the second liquidation of the bank notified this week, members of the VC community lament the role other investors played in SVB’s demise.

“This was a hysteria-induced bank run caused by VCs,” Ryan Falvey, a fintech investor with Restive Ventures, told CNBC. “This will go down as one of the ultimate cases of an industry cutting off its nose to spite its face.”

The episode is the latest fallout from Federal Reserves measures to stem inflation with its most aggressive rate hike campaign in four decades. The consequences could be far-reaching, with concerns that startups could be cannot pay employees in the coming days, venture capitalists may struggle to raise money, and an already vulnerable sector may face a deeper malaise.

The roots of SVB’s collapse stem from dislocations spurred by higher prices. As startup clients pulled in deposits to keep their companies afloat in a chilly environment for IPOs and private fundraising, SVB found itself short on capital. The bank had been forced to sell all of its available-for-sale bonds at a loss of $1.8 billion, the bank said late Wednesday.

The sudden need for new capital, coming on the heels of the collapse of crypto-focused Silvergate bank, triggered another wave of deposit withdrawals on Thursday as VCs instructed their portfolio companies to move money, according to people with knowledge of the matter. The worry: a bank run on SVB could pose an existential threat to startups that couldn’t leverage their deposits.

SVB clients said they lost confidence after CEO Greg Becker urged them to “keep calm” on a call that began Thursday afternoon, and the stock’s collapse continued unabated, reaching 60% in late regular trading. Importantly, Becker could not assure listeners that the capital increase would be the bank’s last, a person on the call said.

All told, customers withdrew an astonishing $42 billion in deposits by the end of Thursday, according to a California authority notification.

At the close that day, SVB had a negative cash balance of $958 million, according to the filing, and failed to scrape enough collateral from other sources, the regulator said.

On Friday, when shares in SVB continued to fall, the bank had efforts made to sell shares, CNBC’s David Faber reported. Instead, it searched for a buyer, he reported. But the flight of deposits made the sales process more difficult, and that effort also failed, Faber said.

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

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

“It’s business as usual at SVB,” wrote the banker. “Understandably there may be questions and I want to make myself available if you have any concerns.”

Falvey, a former SVB employee who started his own fund in 2018, pointed to the highly interconnected nature of technology investors as a key reason for the bank’s sudden demise. Prominent funds including Union Square Ventures and Coatue Management blasted emails to their entire lists of startups in recent days, instructing them to pull money out of SVB due to concerns about a bank run. Social media only increased the panic, he noted.

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

Falvey, who began his career at Wells Fargo and consulted for a bank seized during the financial crisis, said his analysis of SVB’s mid-quarter update gave him confidence. The bank was well capitalized and could make all depositors whole, he said. He even advised his portfolio companies to keep their funds with SVB when the rumors swirled.

Now, thanks to the bank run that ended in SVB’s seizure, those who remained with SVB face an uncertain timeline to get their money back. Although insured deposits are expected to become available quickly, most of the deposits held by SVB were uninsured and it is unclear when they will be released.

“The rapid withdrawal of deposits has left the bank unable to pay its obligations as they fall due,” the California financial regulator noted. “the bank is now insolvent.”