Silicon Valley Bank is officially gone.
The Federal Deposit Insurance Corporation (FDIC) has decided to break up the commercial bank, and will hold two auctions to sell both SVB's traditional deposits unit and its private bank.
The bank failed on March 10 amid a tightening tech economy, but the FDIC was seeking a buyer for it last week. Now that it hasn't found one, auctions are the next step.
What Killed SVB?
Until this month, SVB was the 16th largest bank in the US and Silicon Valley's number-one largest bank, at least by deposits. At the end of 2022, regulators says, SVB held $209 billion in assets plus $175 billion in deposits.
So how did it collapse? Well, the long explanation would take too long, but the short one is that all banks work by getting funds through deposits and giving funds through loans. SVB was a popular bank for startups and venture funding. Across the last few years, startups in general had a lot of liquidity — IPOs, venture capital investments, acquisitions, and other fundraising activities were booming — so they made a lot of deposits.
But then interest rates started to rise sharply, and investors started wanting to have money now rather than in the far future. This made startups, which tend to burn money now in order to possibly make ten times more in a decade or two, look like a bad investment. And since SVB wasn't making as many bets on credit through loans, it was making more bets on interest rates through securities, and higher interest rates hurt it there, too.
When SVB sold a portfolio of securities to Goldman Sachs at a $1.8 billion loss, it spooked its startups, who then triggered a run on the bank, just like that one scene in It's a Wonderful Life.
How Are People Responding to SVB Collapse?
High interest rates tend to hurt frothier industries, which is a term that could accurately describe the last decade of technology businesses. Since SVB bet big on startups, it was hurt more than other banks were by the industry's belt-tightening.
But many are arguing that the bank's trigger-happy clients are really to blame for the lender's collapse, since none of them were willing to wait out the crisis and instead made it worse:
A bunch of replies are arguing this is unfair to VCs but @matt_levine already covered this with an excellent comparison to what's happening with First Republic.
VCs basically failed the game of prisoner's dilemma and have now hurt their ecosystem while bankers are being smarter. pic.twitter.com/smnd2KlIro
— Dare Obasanjo (@Carnage4Life) March 20, 2023
Whoever is to blame, the outcome is that the FDIC is essentially stripping the failed bank for funds to go towards paying back investors.
It is now seeking bids for Silicon Valley Private Bank from now until March 22, and will seek bids for the bridge bank (which holds assets and deposits) another few days, until March 24.