Silicon Valley Bank 101
Founded in 1983, Silicon Valley Bank (SVB) catered to California’s burgeoning tech scene. It earned Silicon Valley’s trust by working with unproven companies that most lenders ignored. Providing white glove customer service forged tight-knit relationships with startups, founders, and VCs. SVB built a sterling reputation by offering a one-stop-shop for founders, including cash management, loans, wealth management, mortgages, and — this being California — vineyard finance. Over 40 years, SVB went from a fledgling to the nation’s 16th largest bank, with around $200 billion of assets in January 2023.
What was built over decades crumbled in hours. On March 10th, this venerable institution and darling of Sand Hill Road imploded. Citing inadequate liquidity and insolvency, the California Department of Financial Protection and Innovation put SVB into receivership in an unusual mid-day announcement. The Federal Deposit Insurance Corporation (FDIC) took control, marking the largest US bank failure since the 2008 financial crisis.
What is a Bank?
Banks take deposits and make loans. They generate revenue from the spread between the two. Let’s say you deposit your paycheck into a checking account at JP Morgan. This account likely pays no interest. JP Morgan then lends this money out as a mortgage at 6% (or as a small business loan, or a credit card, or any other banking product) and pockets the interest and fees.
The US banking system operates with fractional reserves, meaning that banks only keep a portion of deposits on hand to satisfy customer withdrawals. The remainder can be lent out. If your paycheck is $1,000, JP Morgan might need to keep $100 in its coffers, but is free to do as it pleases with the remainder.
Every bank borrows short to lend long. While many deposits can be accessed on demand, loans are paid back over time. You can walk up to an ATM and withdraw your $1,000 whenever. However, JP Morgan might have lent your $900 (they kept $100 on hand) out as a 30 year mortgage. There’s an inherent timing mismatch between deposits (liabilities) and loans (assets). No bank can survive if all depositors want their cash back at the same time. Generally this doesn’t happen. But sometimes it does. That’s why banking is a confidence game, and confidence is a fragile thing. As SVB shows, when depositors lose faith, things can go south fast.