International Tax Panorama

California-based Silicon Valley Bank (SVB), a cornerstone of US technology and startup industry, was shut down by regulators, making it one of the largest bank failures after the 2008 financial crisis.

But how?

SVB’s problems were sparked by customer withdrawals that led the company to liquidate securities positions. 

But its values had plummeted due to the Federal Reserve’s interest rate hikes. 

But why high rate of interest?

With the US Federal Reserve raising interest rates aggressively to rein in inflation, the value of existing bonds that were issued at lower interest rates has fallen. 

Another reason for the rising interest rates was the decline in funding for startups as the venture capital ecosystem took its foot off the gas pedal.

To fund the redemptions, SVB sold on Wednesday a $21 billion bond portfolio consisting mostly of U.S. Treasuries.

Early Thursday, the SVB Financial Group announced it was raising $2.25 billion in a share sale.

The company also said that it booked a massive after-tax loss of $1.8 billion on sales of these investments.

In reaction, the firm’s shares collapsed 60 percent in New York on Thursday and trading was suspended Friday morning, before regulators announced they had closed the bank.

Impact on Startup community:

The collapse sent shockwaves through the startup community, which has come to view the lender as a source of reliable capital.

As 89% of the bank’s $175 billion in deposits were uninsured as the end of 2022, according to the FDIC, and their fate remains to be determined.

Companies such as video game maker Roblox Corp RBLX.N and streaming device maker Roku Inc (ROKU.O) said they had hundreds of millions of deposits at the bank. Roku said its deposits with SVB were largely uninsured, sending its shares down 10% in extended trading.

What happens next? 

Late Friday, the US Federal Deposit Insurance Corporation (FDIC) said that SVB was closed by the California Department of Financial Protection and Innovation. “To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB). At the time of closing, the FDIC as receiver immediately transferred to the DINB all insured deposits of Silicon Valley Bank,” it said.

The FDIC will sell the assets of SVB, while the DINB will maintain its normal business activities. While the insured depositors of SVB will receive their insured deposits, the uninsured depositors in the bank will be paid dividends from the asset sale.