Analysis by Jeff Liguori for BusinessWest.com
Silicon Valley Bank (SVB), a California-based lender, was taken over by the FDIC due to fears of insolvency. The process was one of the swiftest in history.
Silicon Valley Bank was a niche banking franchise founded in 1983 to fill a growing need in the financial-services marketplace. The primary customers of the bank were private equity firms and their principals. Typically, private equity firms (or venture capital, which is a subset of private equity) invest in startup companies, help those companies grow, and eventually, if successful, have those companies go public or get sold in a liquidity event. Liquidity events — or lack thereof — are a critical piece in the demise of Silicon Valley Bank.
As a banking partner to these firms, SVB routinely made loans to its portfolio companies. The bank filled a very specific need: extending credit to companies that were often in growth mode, and not profitable — a distinct customer base that generally could not get credit from traditional commercial banks. As a result, when those private companies either went public or were sold, loans were paid off, and deposits at the bank (proceeds from liquidity events) rose, which created a loyal customer base. And not only was SVB extending credit to these firms, but the bank also held the operating accounts for those growing businesses as well as accounts for its private equity firms’ investors. Balances on such accounts regularly exceeded the FDIC insured level of $250,000. SVB generally held a larger number of uninsured deposits than most banks.
From its founding in 1983 to the end of 2022, with a very narrow customer base, Silicon Valley Bank’s assets grew nearly 25,000%, and its stock price appreciated 7,000%.