Silicon Valley Bank: Background, Consequences and Resources

On Friday, March 10th 2023 one of the most prominent lenders in the world of technology companies, Silicon Valley Bank, collapsed after a bank run and capital crisis led to the second-largest failure of a financial institution in US history. The Federal Deposit Insurance Corporation (FDIC) had to take over the 40-year-old institution that had over USD 200bn in assets at the end of 2022.

SVB was the premier banking partner for startups and growth companies that have raised (and thus deposited) large sums in the low interest rate environment in the past decade - so much that SVB’s deposits grew from USD 49bn at the end of 2018 to ~190bn at the end of 2021.

As banks do, SVB invested a large share of those customer deposits into long-dated Treasury and mortgage bonds just before the Federal Reserve began to raise interest rates, then failed to make provisions for the possibility of rising interest rates. As interest rates rose, the bank's holdings became less attractive, and its clients began to withdraw their money, which forced the bank to sell off some of its investments. This led to a loss of nearly USD 2bn for the bank, which SVB communicated on Thursday, March 9th.

Those news started an unfavourable set of effects for SVB: through the loss announcement, even more companies started to withdraw their assets from SVB, which further deepened its liquidity crisis with clients withdrawing as much as USD 42bn on March 9th alone.

Ultimately the FDIC had to step in and take over the bank. Information collected from articles from the New York Times, CNBC, Barron’s and The information.

Next steps

All insured depositors will have full access to their insured deposits (up to USD 250’000 per customer) no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds.

As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors, this process might take months or even years to complete.

Official statement from FDIC

The UK business of SVB became a separate subsidiary from the US bank. This means it is separately regulated, ring fenced from US business with separate capital requirements, liquidity requirements, board of directors, etc. .

There is no commingling of funds with US entity. However, the UK arm of the US bank was also put into bank insolvency procedure by the Bank of England on Friday. This procedure allows depositors to be paid up to GBP 85’000 as quickly as possible from all deposits. Liquidators will manage the remaining assets and distribute them to depositors over time (Financial Times).

More information

List of all funds that were likely customers of SVB.

Circle, the company issuing the USD-pegged stablecoin USDC, holds USD 3.3bn of its USD 40bn USDC reserves at the collapsed Silicon Valley Bank.

As long as it remains unclear A) what percentage of the USD held with SVB will be recovered and B) when they will be recovered, the USDC token in circulation are not entirely backed by USD anymore.

Assuming a 10% haircut on SVB deposits, this would imply that USDC is effectively underbacked by USD 330M. Therefore, the stablecoin de-pegged from USD and is trading at ~0.91 USD per USDC on Saturday afternoon (CNBC, Coingecko).

Until Friday afternoon, redemptions from USDC to USD at Circle were still available and functioning as usual.

What will happen to USDC in case the deposits remain unaccessible or are lost?

It seems that Circle has currently paused the possibility to redeem USDC against USD. Ultimately, if Circle doesn’t fill the gap (e.g. through income they generate from interest on their USD held in custody), USDC will remain underbacked (and likely stay de-pegged).

Overview of Circle’s collateral holdings (page 4 from here)

What does this mean for other stablecoins?

USDT (stablecoin backed by USD in custody) issued by Tether remains pegged at USD 1 and is able to be withdrawn and redeemed with Tether.

LUSD (stablecoin issued by Liquity.org and backed by Ether deposits) was shortly trading below USD 1 but through arbitrage is currently returning to its peg.

What does this mean for DeFi?

If a major stablecoin such as USDC were to collapse or lose its peg to the USD over a prolonged period of time, it could undermine confidence in the DeFi ecosystem as a whole, leading to reduced trading volume and liquidity. This could cause a decline in the value of other tokens used in DeFi. Additionally, it could also trigger a wave of forced liquidations and defaults, leading to significant losses across the ecosystem.

What happened to Silvergate bank?

Silvergate Capital, a major lender in the crypto industry, said on Wednesday that its shutting down operations and liquidating its bank. Bankrupt crypto exchange FTX was a major Silvergate customer (CNBC)

What is going to happen to customers who held deposits with Silvergate?

All deposits will be fully repaid, according to the liquidation plan that was shared on Wednesday. The company didn’t say how it plans to resolve claims against its business. Centerview Partners will act as Silvergate’s financial advisor and Cravath, Swaine & Moore will provide legal services (CNBC).

As always when the outcome isn’t clear, there is wild speculation on both ends of the spectrum. Here’s a list of opinions and tidbits from the ecosystem.

The liquidation of SVB assets takes years to complete and many depositors need to take a significant haircut on their deposits. Many startups, technology companies and funds don’t have access to their capital for months or even years and need to raise more capital immediately at potentially disastrous terms (The information).

This could then lead to a broader liquidity crisis across the startup ecosystem, as other lenders and investors become hesitant to extend credit or invest in new startups. This could lead to a decline in startup formation and innovation, as entrepreneurs struggle to secure the financing they need to launch and grow their businesses.

In addition, the collapse of a major lender could also have a ripple effect on other players in the ecosystem, such as venture capital firms and angel investors. These investors may become more cautious and risk-averse, leading to a slowdown in deal-making and a decline in valuations for startups (The information, Value and Opportunity).

In former FDIC processes, depositors received 62% of its deposits paid out right away and ultimately recovered 94% of its deposits (Adam Cochran on Twitter).

An alternative could be that either the US Government steps in and bails SVB out or a competitor takes over SVB and guarantees the customer deposits:

If we apply the optimistic scenario from Adam Cochran’s tweet to Circle, it would lead to a loss of USD 200M, which Circle should be able to cover from its earnings on its USD deposits (Avi Felman)

Uncapped emergency funding programme:

Brex offering emergency line to startups that were affected

Person on Linkedin connecting those interested with a friend of his

SeriesFi offering a fast-tracked way to an account

Official FDIC page for depositors and lenders

Barrons

Be in Crypto

Circle

CNBC

FDIC

Financial Times

Reuters

The Block

The Information

Value and Opportunity