Silicon Valley is California’s most powerful economic engine, with venture capitalists and major corporations like Google, Apple, and Twitter reaching the far corners of the world to generate tremendous wealth and pumping billions into the state’s economy. Which made California one of the most powerful economies in the world, soon to surpass Germany as the world’s fourth most powerful economy.
But in light of the recent collapse of Silicon Valley Bank, founded in 1983, let’s consider whether this is a one-off issue or a sign of trouble brewing.
Bank deposits and FDIC insurance
The FDIC insures up to $250,000 of bank deposits in the event of bank failure. Roughly 80% of bank deposits fall south of that. So, while some wealthy individuals may have $500,000 or $1,000,000 deposited in local banks, most of us have less than $250,000 in the bank. Silicon Valley Bank, however, is the inverse of that. Most of its deposits are well north of that because it primarily services venture capitalists and tech startups who deal with large transactions, so most of its deposits fall well north of the FDICs $250,000 insurance limit, meaning they were not insured.
Banks rely on buying bonds to keep a stable and safe balance sheets and backup deposits. Unfortunately, bonds lose value as interest rates rise. SVB most likely invested heavily in bonds, as in billions, when interest rates were low. But now that rates are rising, their bond portfolio started losing value so they started dumping them as fast as they could. That move caused panic with depositors who rushed to take their money out, all at once, causing the bank to collapse.
So, no need to panic because all of this has no impact on your local bank.
What happened to SVB did, however, send shockwaves through Silicon Valley because the bank played a primary role in financing start-up companies. With recent moves by big corporations to lay-offs workers and slowed venture capital activity, this may be a case of isolated trouble brewing in Silicon Valley.
But let us hope Silicon Valley is not in trouble because it remains the destination for innovative minds to find solutions to our most pressing issues.
L
