American Bank Collapse

 

Recent situation of American bank

The technology sector faces another challenge as its go-to specialized bank, Silicon Valley Bank, collapsed after a bank run.

The hard-hit tech sector first made news in late 2022 and early 2023 with mass layoffs. This collapse is another setback for the tech industry and is the biggest bank failure since Washington Mutual in 2008.

The U.S. government stepped in to protect customer deposits, and HSBC plans to purchase the U.K. portion of Silicon Valley Bank (SVB). Signature Bank is another regional bank that was on the brink of collapse, and the government has already stepped in to guarantee deposits.

Here's what happened to SVB and how it may affect tech companies and startups moving forward.

What is Silicon Valley Bank?

SVB was founded in 1983 and was the 16th largest U.S. bank before its collapse. They specialized in financing and banking for venture capital-backed startup companies -- mostly technology companies. Venture capital firms did business there as well as several tech executives.

Based in Silicon Valley, SVB had assets totaling $209 billion at the end of 2022, according to the Federal Deposit Insurance Corporation (FDIC).

Why was SVB important to the tech sector?

SVB provided financing for about half of all U.S. venture-backed technology and healthcare companies. SVB was a preferred bank for the tech sector because they supported startup companies that not all banks would accept due to higher risks.

The pandemic in 2020 was a hot market for tech companies as consumers spent big money on digital services and electronics. Tech companies had a large influx of cash, and SVB's services were needed during this time to hold their cash for business expenses, such as payroll. The bank invested much of these deposits as banks typically do.

Why did it collapse?

The collapse happened for multiple reasons, including a lack of diversification and a classic bank run, where many customers withdrew their deposits simultaneously due to fears of the bank's solvency. Many of SVB's depositors were startup companies. They deposited large amounts of cash from investors because tech was in high demand during the pandemic, said Jay Jung, founder and managing partner of Embarc Advisors.