Historic Bank Collapse May Have a Lasting Effect on the Tech Industry


Last week, the second largest bank failure in United States history took place when Silicon Valley Bank (SVB), a trusted name for tech startups over the last 40 years, collapsed. 

SVB gained a reputation for offering lines of credit to tech companies that many other banks deemed too risky. After decades of building technology-related relationships, SVB tripled in size during the 2020 to 2022 tech boom and used many of those funds to purchase bonds. These bonds were subjected to interest rate increases by the Federal Reserve, but as banks typically would not sell for a loss unless absolutely necessary, no alarms were raised. However, when the technology industry lost $7.4 trillion throughout 2022, tech startups began withdrawing more cash, eventually putting pressure on SVB to sell the bonds at a loss. On March 8, SVB announced a total loss of $1.8 billion. Within a day of the announcement, SVB shares dropped 60 percent, and by March 10, rapid withdrawals put the bank on the brink of collapse. Since the Federal Deposit Insurance Corporation limits deposit insurance to $250,000, as much as 90 percent of SVB’s deposits were uninsured. So to avoid further catastrophe, the government stepped in to guarantee all deposits, even those exceeding $250,000.

Now that tech companies can keep their lights on, people are trying to understand what led to the collapse. Washington quickly began suggesting various contributors among which was a controversial deregulatory reform. In 2018, Congress passed a law that rolled back items in the Dodd-Frank Act which was originally enacted in response to the 2008 financial crisis. The Dodd-Frank Act required banks with over $50 billion in assets to be considered “systemically important” and required them to be subject to stress tests, capital planning, and liquidity requirements. The 2018 law pushed back the $50 billion threshold to $250 billion, thereby reducing stress testing and, according to some experts, undermining financial stability protection rules. Though not everyone agrees that deregulations can be blamed for SVB’s collapse, many concur that an overall lack of supervision is at fault.

While experts and politicians attempt to figure out where SVB went wrong, startups in the tech industry still find themselves in an uncomfortable position. Clients within the climate technology industry have expressed concern for the future of climate startups. SVB provided financing to over 1,550 clients in the industry, committed $3.2 billion to climate projects, and financed around 60 percent of the community solar market. What was once a bank that “understood startups, [and] understood venture capital” is now under government control, and some analysts predict that the fallout from the SVB collapse will continue to impact the tech landscape for years. Despite having their deposits restored, the uncertain fate of existing credit lines and future loans leave many feeling anxious about the future of their businesses.