Banks Fail: A Devastating Blow to the Startup Scene

Silicon Valley Bank suffered a collapse on March 10th, which is now known as the second-largest bank failure in the history of the United States. This bank provided banking and lending services to renowned companies such as Roku, Pinterest, Square, Cisco, and Airbnb. The bank's shares fell by 60% in a single day, leading regulators to shut it down.

The collapse of the bank that served almost half of the country's health and tech venture companies happened abruptly, leaving many wondering how exactly this collapse happened. The US Federal Reserve laid the foundation for the collapse with increased interest rates, keeping them higher than they had been since 2007. Higher rates lead to higher borrowing costs, which leads to fewer people and businesses borrowing money. The tech startup industry slowed down as a result, which was catastrophic for SVB, as most of its client base is comprised of tech startups.

The bank tried to come up with over $2 billion to strengthen its financial position before the collapse, but this became an unintended catalyst for the events to follow. As prominent investors and companies lost faith in the bank due to its inability to come up with the $2 billion, they started withdrawing money from their accounts. Within a short time, the bank was unable to pay back the withdrawals.

Consequently, regulators shut down the bank on Friday. As more people ran to withdraw their savings, the bank was led to a faster collapse. Silicon Valley Bank's client base was mainly comprised of tech companies, many of which are now concerned about the fate of their funds. The collapse of the bank may cause difficulties for companies trying to pay salaries and other expenses. It is predicted that companies may have to lay off employees or find ways to reduce costs while seeking reimbursement.

The Federal Deposit Insurance Corporation (FDIC) is in charge of facilitating reimbursement. The FDIC's website lists "Silicon Valley Bank" as the first link, underscoring the collapse's significance. Most deposits up to $250,000 are insured by the FDIC, but for companies with millions in the bank, this is insignificant. However, the FDIC has promised prompt insurance payouts by the Monday following the collapse.

The impact of the collapse remains unclear, but investors and companies are likely to be more cautious when diversifying their savings. There are concerns about the "contagion" effect, where smaller banks may be negatively impacted by the collapse. Nevertheless, the immediate aftermath of the collapse is one of shock, and considered one of the most devastating bank collapses in recent memory.

Evan O' Driscoll '24 is a Vol. 71 Contributing Editor