Silicon Valley Bank was founded in 1983, just as the region around San Jose started to boom. It grew into one of the largest financial houses in the country. Then, in a matter of days, it was gone.
A commentary published by CalMatters on March 14, 2023, asked what the failure means for California. Its starting point was the size of the industry the bank served. Gov. Gavin Newsom had recently called Silicon Valley the “tent pole for our economy,” and the commentary said that, for once, he was not exaggerating. The high technology industry took off four decades earlier while the state’s manufacturing sector, a product of World War II and its aftermath, was shrinking. It became California’s most powerful economic engine. Without it, the commentary argued, the state could not have become the fifth, and quite possibly the fourth, most powerful economy in the world.
How the run unfolded
Depositors pulled money out of SVB and the bank could not raise enough cash to cover the demand. State and federal financial regulators stepped in, closed it and began looking for a buyer. The shock traveled quickly through the valley, because the bank financed start-up companies and supplied the cash many of them used for payroll and other bills.
Small depositors were covered by insurance. Hundreds of corporate customers were not, since their balances were above the $250,000 insurance limit, and they suddenly could not withdraw. Federal authorities defused the immediate crisis on Sunday by arranging Federal Reserve loans so depositors could take out their money in full. They also made funds available to prop up other specialty banks that might face runs.
The commentary traced the collapse to the bank’s bond portfolio. When the Federal Reserve began raising interest rates to fight inflation, those bonds lost value. SVB then had to sell the devalued bonds to meet withdrawal demands, and the sales set off what the piece called a death spiral. Its owners had thrived by immersing themselves in the region’s culture of aggressive innovation, yet that narrow focus left the bank exposed to outside economic forces.
A harbinger?
Even with the emergency action, the commentary called the failure a serious blow to tech, given the bank’s role as a direct lender, a financial service provider and what it described as a midwife for attracting venture capital. Federal authorities were looking for a buyer, quite possibly one of the larger national banks. A new owner, the piece said, would not have the same close relationship with the region.
The bank’s troubles arrived at an uncertain time. Corporations in the valley had been laying off workers in recent months, and venture capital activity had slowed. Joint Venture Silicon Valley, a local industry organization, had issued its annual report on the regional economy a few weeks earlier, stressing a shift from a cauldron of start-ups to dominance by a few giants. “Tech is going through a painful period,” its president, Russell Hancock, said, though he added hopefully that “there is no way to construe what is happening as a crisis” for the sector.
The commentary’s question was whether the bank’s failure signals the decline of Silicon Valley itself.
