Silicon Valley Bank Disaster: what’s the fuss about? How will it affect tech? Banking?
Silicon Valley Bank Disaster
Friday March 10th California banking regulators shut down the Silicon Valley Bank. Around the same time U.S. banking officials shut down two other banks, one of them the Signature Bank of New York. Some folks immediately started worrying there would be a run on all the American banks.
Those two other banks were heavily into cryptocurrency. When FTX collapsed amid fraud charges against its CEO Sam Friedman back in November anyone heavily invested in crypto took big losses. Silicon Valley Bank was not caught out by silly cryptocurrency investments.
What took down SVB?
The executives at SVB did two things that brought down their bank. First they lobbied then president Trump to remove certain banking restrictions (restrictions that were put in place after the American banking collapse in 2008). That accomplished, the executives then gambled with investments that assumed interest rates would remain low.
What was SVB?
Silicon Valley bank started in 1983 as a way of funding tech startups. SVB was one of the few banks that would lend to tech startups headed up women and minorities. The SVB abrupt closure hurt many of these companies for several days as they couldn’t cover payroll or pay vendors. Under U.S. banking rules, FDIC insures deposits up to $250,000. Most of these tech startups had millions in their accounts not covered by deposit insurance. Just for comparison, in Canada the CDIC insures deposits up to $100,000.
Etsy, a client of SVB, couldn’t pay their clients, lot of small businesses not tech related. Shopify, though Canadian, had SVB accounts as well but were not affected.
The FDIC took the unprecedented step of insuring all the deposits at the Silicon Valley Bank a few days after the collapse. FCIC officials said that it would not cost American taxpayers any money but were short on details about how they might achieve that. Elizabeth Warren and other Democrats are busy trying to put back the banking restrictions which would have prevented the Silicon Valley bank disaster.
How does this affect Canada? One of the questions raised by the SVB disaster is why the CDIC only insures deposits up to $100,000. The other question is why doesn’t Canada have a bank devoted to tech startups.
The most important question is why media, and tech media, keep falling for hype instead of investigating. Forbes magazine ranked the Silicon Valley Bank in American’s Best Banks for 5 years running including 2023. I found this uncredited montage of Forbes winners on Twitter that sums it up quite nicely.