5 things to know about the Silicon Valley Bank collapse

Correction: This article has been updated to correct the name of the Federal Deposit Insurance Corporation.

Regulators shut down Silicon Valley Bank on Friday, marking the biggest bank failure since the 2008 recession and sending shockwaves across the tech world. 

The Federal Deposit Insurance Corporation (FDIC) created a National Bank of Santa Clara to hold deposits and other assets of the failed Silicon Valley Bank, but the abrupt closing is impacting tech firms that face immediate effects, like ensuring employees get paid. 

More than 93 percent of the $161 billion deposited at Silicon Valley Bank is not insured by the FDIC, according to a Bloomberg News analysis.

Here’s how Fed rate hikes are hurting tech firms

The closure will have further reaching impacts for the tech world and is spurring additional concerns for banks.

Here’s five things to know about the Silicon Valley Bank collapse. 

Silicon Valley Bank was a major force in tech

Silicon Valley Bank (SVB), established four decades ago, catered to the startup and venture capital-funded tech world. Its clients included brands such as Shopify, ZipRecruiter and venture capital firm Andreessen Horowitz, according to the bank’s website. 

Wedbush analyst Dan Ives called it a “nightmare situation.” 

“This will have a massive ripple impact across the tech ecosystem and Silicon Valley private company artery. SVB is a foundational piece of the tech startup community and will have a constrained impact on funding for tech startups going forward,” Ives said in an email. 

Even businesses that aren’t clients are getting impacted by the closure, especially with the most immediate impact on delaying payrolls. 

Parker Conrad, CEO of Rippling, a payroll processor that used Silicon Valley Bank, said there would be payment delays of pay runs initiated earlier this week.

The company is focused on “getting these employees paid as quickly as possible,” he said in a Twitter thread. Going forward, Rippling will use JPMorgan Chase & Co. 

Kevin Yun, co-founder of GrowSurf, told Semafor that he thought he had “nothing to do with SVB,” since his customer-referral software company used another bank, Mercury.

But by using Rippling, his company is getting roped into the larger impact of the shutdown, too. 

The bank is the latest tech victim of high interest rates

Silicon Valley Bank was hit hard by the Federal Reserve’s series of rising interest rates. It’s the latest way the interest rates have hit the tech sector. 

Tech companies and the ecosystem they are created in are highly sensitive to increases in interest rates because many companies, particularly startups, operate on high levels of debt.

Venture capital and other riskier forms investment also become less profitable as businesses face higher borrowing costs, and the steep decline in crypto values also sapped billions from many tech businesses.

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Tech firms that had been spending high responded to the rising Fed interest rates with layoffs, including at some of the nation’s largest companies like Facebook parent company Meta, Google parent company Alphabet and Amazon. 

Those three companies alone have recently rolled out plans to lay off a combined 41,000 employees. 

But now even nascent startups, already facing headwinds from the rising rates, now have another hurdle in their way. 

The collapse was remarkably abrupt 

It’s rare for the FDIC to take over banks as large as Silicon Valley Bank. It’s even rarer for the agency to take one over in the middle of the workday.

Traditionally, the FDIC will announce its decision to take over and liquidate a bank after the stock market has closed on Friday to limit the potential damage to customers.

But the speed of Silicon Valley’s collapse prompted bank regulators to jump into action, which stunned banking experts and sector analysts.

The bank’s death spiral began Thursday, shortly after Silicon Valley executives announced plans to raise up to $1.75 billion in capital to shore up its books.

As customers sought to pull out their funds hand over fist, the California Department of Financial Protection and Innovation stepped in to end the bank run on Friday.

The state agency seized the bank and handed it over to the FDIC, which will take the bank apart in an attempt to make its customers and debtors whole.

Only a fraction of customer funds may be covered by regulators

Silicon Valley Bank was overseen by the FDIC, a federal agency responsible for making sure banks are sturdy and responsible enough to serve their customers.

When an FDIC-regulated bank fails, its customers are insured to up to $250,000 per account with the bank. 

While some customers may get all of their money refunded by the FDIC, scores of businesses and individuals with millions of dollars in the bank may see little of it returned.

The FDIC said Friday that customers will have access to their insured deposits no later than Monday morning. Uninsured depositors will receive a dividend and a certificate indicating how much money they are owed from the bank as the FDIC sells off its assets.

The collapse is spurring broader concerns for banks

Silicon Valley Bank was the largest bank collapse since the financial crisis in 2008 and its meltdown spurred concerns of a broader decline across the sector.

The Dow Jones Industrial Average, S&P 500 index and Nasdaq composite all closed with losses of more than 1 percent Friday as shares of banks big and small took a nosedive.

Market operators froze shares of several bank stocks, including First Republic, PacWest and crypto-focused Signature bank due to high volatility, according to CNBC, and even Goldman Sachs and Bank of America shares took a hit.

Treasury Secretary Janet Yellen convened a meeting of federal banking regulators Friday, the Treasury Department announced, to discuss the ongoing damage caused by the collapse of Silicon Valley Bank.

Even so, she “expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient.”

Cecilia Rouse, chairwoman of the White House Council of Economic Advisers, also told reporters Friday she believed the banking forms imposed after the 2007-08 crisis will shield the economy from deeper harm.

“Our banking system is far more resilient than it was in 2008, we learned a lot, we’ve got better tools specifically so we can protect the important investments of Americans,” Rouse said.

While Silicon Valley Bank’s collapse could be devastating for scores of tech companies and thousands of industry workers, more banking experts are confident it won’t trigger a broader crisis in the industry.

The bank was uniquely dependent on the growth of major tech firms and the financial health of the industry at large, which made it highly susceptible to damage from rate hikes.

“[Silicon Valley Bank’s] balance sheet looks nothing like most US banks’,” wrote Karen Shaw Petrou, managing partner at Federal Financial Analytics, in a Friday tweet.

“This isn’t systemic, but it shouldn’t have happened,” Petrou continued.

Alex Gangitano contributed.