Silicon Valley Bank, the 16th-largest bank in the US, collapsed last week. This marks the largest bank to collapse since the 2008 financial crisis.
On Friday, Silicon Valley Bank, the Santa Clara-based bank primarily serving the tech startup sphere, collapsed. California regulators closed down the lender and put it under the control of the FDIC. It all started when the bank announced it sold securities at a loss and had to sell over $2 billion in new shares to improve its balance sheet.
How could this happen to such a seemingly solid financial institution? The answer lies in the current economic environment, including the Fed’s repeated interest rate hikes over the past year. Banks like Silicon Valley bought up seemingly low-risk treasures, taking advantage of historically low-interest rates during the height of the pandemic. But when interest rates rose, the value of those assets plummeted, leaving the bank with unprecedented losses.
It’s not just interest rates that are to blame. Tech has been hit hard by the recent downturn in the economy, making it harder for startups to raise funds from formerly generous venture capital firms. That meant that many tech companies were withdrawing deposits they had with Silicon Valley Bank to fund day-to-day operations like payroll.
As the bank was FDIC-insured, depositors will automatically receive access to their deposits up to $250,000, but estimates say that still leaves about 90% of deposits uninsured. The Biden administration then guaranteed that customers will receive access to all their funds.
What does this mean for other banks?
As of what we know now, the failure of Silicon Valley Bank isn’t necessarily an indicator of a major global banking crisis. For one, Silicon Valley Bank was very uniquely structured in that it served a niche – almost exclusively serving the world of VC-backed tech companies. Most other banks, even regional banks, are more diversified across multiple industries so that they’re not overly dependent on the success of one specific field.
Treasury Secretary Janet Yellen said regulators are considering a wide range of options for SVB, including acquisitions, to ensure confidence in the US banking system. The government also offered loans to other banks so they don’t face similar consequences if they’re facing dramatic losses on assets invested in during low interest rates.
Silicon Valley Bank’s UK Arm Gets Acquired by HSBC
On Monday, the Asia-based bank HSBC announced that its UK subsidiary, HSBC UK Bank, had agreed to acquire Silicon Valley Bank’s UK operations for just £1.
As of now, it’s unclear what will be the fate of the bank’s core US operations.
What do you need to know before opening a business banking account?
Whether you own a tech startup, like the former clientele of Silicon Valley Bank, or a small mom-and-pop shop, taking the time to choose a trustworthy business banking partner is absolutely critical.
Key considerations to look out for when selecting a business banking account include:
- FDIC insurance: Choosing an account with FDIC insurance means the FDIC will provide you coverage up to $250,000 per depositor. This mitigates the risk of losing all of your hard-earned money should the bank go under, like in the case of SVB.
- Reputation: Choose a business banking partner with a strong reputation and solid financial standing. You can research banks online, read reviews, and check their credit ratings to determine their reputation. Lendstart has gathered a list of the top business online banking accounts.
- Security and Protection: Look for a business banking partner that offers robust security measures to protect your funds and personal information.
- Customer Service: Quality customer service is crucial in any banking relationship. Ensure that your business banking partner provides responsive and knowledgeable customer service that is available when you need it.
- Services Offered: It’s crucial to choose a business banking partner that offers a wide range of services that can cater to your specific business needs. These services may include cash management, online banking, merchant services, and lending.
Lastly, be aware of banking scams, which are increasing in popularity. Individuals posing as legitimate banking institutions may try to target you with fake calls, emails and text messages requesting your account information for purposes of stealing from you or committing identity theft. Legitimate banking institutions will never text, email or call you asking for personal or account information.