FOLLOW US

When people put their money into banks, they generally trust that these financial institutions will do the right thing and protect their funds. This is the entire premise and argument for bank usage in the first place.

More often than not, banks do get it right and make sure to protect their customers' funds. However, when they fail to meet the mark, the consequences of this failure can be disastrous.

In the case of Silicon Valley Bank, it's led to the institution being forcibly shuttered by US federal regulators.

Why Silicon Valley Bank is being shut down

Yesterday, the Federal Deposit Insurance Corporation (FDIC) revealed that with regulators shuttering Silicon Bank Valley, Santa Clara, California's new Deposit Insurance National Bank will receive funds from the now disgraced institution.

The demise of Silicon Valley Bank largely comes as a result of the Federal Reserve increasing interest rates. After these interest rates grew, the bank saw its asset sales perform poorly.

Asset troubles eventually led to Silicon Valley Bank deciding upon a high volume of upcoming security sales. Individuals and companies with a lot to lose then subsequently started withdrawing their funds from the bank.

Though, these withdrawals took place in such a rapid timeframe that Silicon Valley Bank essentially ran out of options to avoid total failure.

Various companies that manage payments, such as Upwork (the world's top freelancing site) are advising users with Silicon Valley Bank to change their payment methods listed on the site to avoid issues with receiving their funds.

Per the California Department of Financial Protection and Innovation, Silicon Valley Bank now lacks necessary liquidity, hence facing total insolvency.

Many individuals and businesses with big money in Silicon Valley Bank understandably worry about what will come next for them. However, the FDIC confirmed those with deposits deemed as "insured" can access their funds on the morning of March 13.

These are funds that the FDIC took over since the shutdown of Silicon Valley Bank.

The Potential For More Problems

The failure of Silicon Valley Bank carries the potential to hurt vulnerable startup businesses with funds wrapped up in the institution.

At least some of these startups found themselves scrambling to transfer over to other banks, such as J.P. Morgan Chase. However, the mad rush of people who moved to withdraw money from Silicon Valley Bank makes everything more difficult.

One startup business, Shelf Engine, is especially feeling the pain. To add insult to injury, Silicon Valley Bank regularly provided loans, credit cards, and other services to startups that competing banks didn't want to take a chance on.

It remains to be seen if other financial institutions step in to fill the gap as customers of Silicon Valley Bank face the current fallout.