The financial institution best known for its ties to global tech start-ups and venture capital, Silicon Valley Bank, faced one of banking’s oldest problems – a run on funds – leading to bankruptcy on Friday.

Its collapse is the biggest failure of a financial institution since Washington Mutual collapsed in the midst of a financial crisis more than a decade ago. And it gave immediate results. Some bank-linked startups have struggled to pay their workers and feared they might have to halt projects or lay off employees until they have access to their funds.

How did we get here? Here’s what you need to know about why the bank failed, who was hit the hardest, and what you need to know about how it may and may not affect the broader US banking system, according to an Associated Press analysis.

Why did the Silicon Valley bank fail?

Silicon Valley Bank has been hit hard by the fall in tech stocks over the past year, as well as the US Federal Reserve’s aggressive plan to raise interest rates to fight inflation.

Over the past two years, the bank has bought billions of dollars worth of bonds, using customer deposits, as a regular bank would normally do. These investments are generally safe, but their value has declined because the interest rates on them were lower than on comparable bonds if they were issued in today’s higher interest rate environment.

This is usually not a problem because banks hold them for a long time, unless they need to sell them in an emergency.

But Silicon Valley Bank’s clients have mostly been startups and other tech companies, which have become increasingly cash-strapped over the past year. Venture funding dried up, companies couldn’t get additional funding for money-losing ventures, so they had to tap into their existing capital, which was often held in a Silicon Valley bank that was at the center of the tech startup universe.

Thus, the bank’s customers began to withdraw their deposits. Initially, this was not a big problem, but withdrawals began to require the bank to start selling its own assets to meet the needs of customers. Because Silicon Valley Bank’s clients were mostly corporate and wealthy, they were likely more fearful of the bank’s failure because their deposits were in excess of $250,000, the government’s deposit insurance limit.

This necessitated the sale of normally safe bonds at a loss, and these losses added up to the fact that Silicon Valley Bank effectively became insolvent. The bank tried to raise additional funds through external investors, but could not find them.

A technology bank is facing the oldest problem in banking: the good old foreclosures. Banking regulators had no choice but to freeze the assets of Silicon Valley Bank in order to protect the assets and deposits that still remained with the bank.

What’s next?

Silicon Valley Bank has two big problems, but both could lead to new problems if not addressed quickly.

The most immediate are large bank deposits. The federal government insures deposits up to $250,000, but anything above that level is considered uninsured. The Federal Deposit Insurance Corporation said insured deposits would be available Monday morning. However, the vast majority of Silicon Valley Bank’s deposits were uninsured, a unique characteristic of the bank as its clients were mostly startups and wealthy tech workers.

Not all of these funds are currently available and may need to be made available through a streamlined process. However, many businesses cannot wait weeks to access funds to cover payroll and operating expenses. They may be fired.

Second, Silicon Valley Bank has no buyer. Generally, banking regulators are looking for a stronger bank to take over the assets of a bankrupt bank, but in this case, no other bank took the initiative. The bank that bought Silicon Valley Bank could solve some of the money problems that startups currently don’t have access to.

Could this happen again in 2008?

Not yet, and experts do not expect any problems to spread to the wider banking sector.

The Silicon Valley Bank was big, but its unique feature was that it catered almost exclusively to the tech world and venture capital-backed companies. He has worked extensively with the part of the economy that was hit hard last year.

Other banks are much more diversified across multiple industries, customer bases, and geographies. The latest round of Federal Reserve stress tests of the largest banks and financial institutions showed that they would all survive a deep recession and a significant decline in unemployment.

However, in the world of new technologies, there can be financial implications if the rest of the money cannot be released quickly.

Source: Associated Press.