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Largest failure since financial crisis Silicon Valley Bank, leaving billions stranded

The bank, which operated under the name Silicon Valley Bank, was shut down by California banking regulators on Friday and the Federal Deposit Insurance Corporation (FDIC) was named as receiver for a subsequent sale of its assets.

With around $209 billion in assets and a Santa Clara address, the lender was the 16th largest in the US at the end of the previous year. The details of the tech-focused bank’s sudden demise were unclear, but it appeared that the Fed’s aggressive interest rate increases during the previous year, which had severely tightened financial conditions in the start-up sector where it was a prominent player, were to blame.

The bank lost $1.8 billion on Treasury bonds whose prices were sabotaged by the Fed rate hikes as it sought to acquire capital to counteract fleeing deposits.

The fall of Silicon Valley Bank is the biggest since the collapse of Washington Mutual in 2008, a pivotal event that set off a financial crisis that hampered the economy for years. The 2008 financial crisis led to stricter regulations in the US and abroad.

Since then, regulators have established stricter capital requirements for US banks in an effort to ensure that individual bank failures won’t have a negative impact on the economy and larger financial system.

All Silicon Valley Bank locations, including the main office, will reopen on March 13, and all insured depositors will have full access to their protected funds by Monday morning.

However, according to the FDIC, 89% of the bank’s $175 billion in deposits were not insured as of the end of 2022, and it is still unclear what will happen to them.

According to persons familiar with the situation who asked to remain anonymous because the specifics are classified, the FDIC is reportedly rushing to locate another bank over the weekend that is willing to merge with Silicon Valley Bank. The sources stated that while the FDIC wants to put together such a merger by Monday to protect unsecured deposits, nothing is guaranteed.

Requests for comment from the FDIC were not immediately answered by a spokeswoman.

Separately, according to the sources, Silicon Valley Bank’s parent company, SVB Financial, is attempting to sell its other assets, which include the investment bank SVB Securities, wealth manager Boston Private, and equity research firm MoffettNathanson, by working with investment bank Centerview Partners and law firm Sullivan & Cromwell. According to the sources, these assets can draw rival businesses and private equity groups.

It’s uncertain whether any buyer will step forward to purchase these assets without SVB Finance first declaring bankruptcy. The credit rating organisation S&P Global Ratings stated on Friday that due to its liabilities, SVB Finance will likely file for bankruptcy.

Requests for comment to SVB were not answered.

Businesses like streaming gadget maker Roku Inc. and video game developer Roblox Corp. claimed to have hundreds of millions of dollars deposited with the bank. When Roku revealed that the majority of the deposits it had with SVB were uninsured, its shares fell 10% in extended session.

Technology workers who depended on the bank for their salaries were similarly concerned about receiving their money on Friday. Customers at an SVB location in San Francisco were instructed to call a toll-free number in a notice that was pinned to the door.

Greg Becker, the CEO of SVB Financial, acknowledged the “extremely tough” 48 hours before to the bank’s failure in a video statement to staff members on Friday.

The issues at SVB highlight how market weaknesses are being revealed by an effort by the US Federal Reserve and other central banks to fight inflation by eliminating the period of cheap money. Concerns severely impacted the banking industry.

According to a Reuters assessment, the value of US banks’ stock market holdings has decreased by more than $100 billion over the last two days, and the value of European banks has decreased by almost $50 billion.

In an effort to reassure investors as their shares plummeted, US lenders First Republic Bank (FRC.N) and Western Alliance (WAL.N) stated on Friday that their liquidity and deposits remained solid. Others, like Commerzbank of Germany (CBKG.DE), have made peculiar pronouncements to comfort investors.

As the episode spread worry about hidden vulnerabilities in the banking sector and its sensitivity to increasing interest rates, several analysts predicted further suffering for the industry.

The head of Whalen Global Advisors, Christopher Whalen, warned that there would be a carnage the following week because there are short sellers out there who are going to target every bank, particularly the smaller ones.

In a meeting with banking regulators on Friday, US Treasury Secretary Janet Yellen expressed “complete confidence” in their capacity to address the problem, according to Treasury.

In response to a question regarding the failure of SVB, the White House stated on Friday that it had faith and confidence in US financial regulators.

The atmosphere of rising interest rates is where the collapse of SVB began. Some SVB clients began withdrawing money as higher interest rates forced the market for initial public offerings for many startups to close and increased the cost of private fundraising.

SVB announced on Wednesday that it would sell $2.25 billion in common equity and preferred convertible shares to close the funding gap after selling a $21 billion bond portfolio made up primarily of US Treasury bonds to pay for the redemptions.

On Friday, the falling stock price had rendered the capital raising unworkable. According to sources, the bank tried to explore other options, such as a sale, before regulators intervened and closed the business. Almena State Bank in Kansas closed on October 23, 2020, and it was the last FDIC-insured institution to do so.

Patrick Huston
Patrick Huston
As a senior editor, Patrick is a professional who is in charge of putting out business news. As a senior editor, Patrick is likely to be in charge of the duties of junior editors and writers, make sure the content is correct and high-quality, and work with other departments to make sure the business news is published on time. Patrick knows a lot about business and the latest market trends. He uses this knowledge to choose and edit stories that are both interesting and useful to readers. He also works with reporters and analysts to come up with insightful pieces that help readers keep up with the latest business news. Patrick is a very important part of keeping the public informed and interested in important business issues. He is passionate about journalism and strives for excellence.

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