In the Wake of the Demise of Silicon Valley Bank and Signature Bank: What Fintechs, Private Equity, and Banks Need To Know

On Friday, March 10, the California Department of Financial Protection and Innovation (DFPI) closed Silicon Valley Bank (SVB), the subsidiary of SVB Financial. The Federal Deposit Insurance Corporation (FDIC) was appointed the receiver of its over $250 billion in assets. This is the largest U.S. bank failure since the global financial crisis more than a decade ago.

SVB was the premier financial institution of choice for startups, fintechs, and their venture-capital/private equity (VC/PE) partners. SVB had over $200 billion in deposits in early 2022. Much of those deposits were in excess of the FDIC-insured limit of $250,000.00. To manage this excess liquidity, SVB Financial invested primarily in long-term U.S. Treasury and government-backed mortgage securities with fixed interest rates. This increased SVB’s securities portfolio threefold.

While these securities were safe bets because of the low risk of default, when they need to be liquidated prior to term, in a market of rising interest rates, the securities suddenly have a rapid decline in value. Couple this will a rapid cash outflow from depositors and SVB’s securities portfolio had a gap of $17 billion by the end of 2022.