() — The 48-hour collapse of Silicon Valley Bank led to the second largest bankruptcy of a financial institution in US history.
SVB was one of the 20 largest commercial banks in the United States and is now under the control of the US Federal Deposit Insurance Corporation (FDIC) after it failed to pay customers They withdrew their deposits.
Although experts quashed fears of broader contagion, the bank’s collapse could have significant ramifications for the tech and startup sectors.
This is all we know so far.
SVB was a huge bank
Founded in 1983, Silicon Valley Bank provided financing to nearly half of all US corporate-backed healthcare and technology companies. These companies have been hurt by higher interest rates and declining venture capital.
And while relatively unknown outside of Silicon Valley, SVB was among the top 20 US commercial banks, with $209 billion in total assets at the end of last year, according to the FDIC.
Its surprising and seemingly rapid decline is the biggest US bank closure since Washington Mutual in 2008.
The FDIC acted unusually quickly
The wheels began to spin on Wednesday, when SVB announced it had sold a bunch of losing stocks and would sell $2.25bn in new shares to shore up its balance sheet.
California regulators shut down the tech lender on Friday. The FDIC acts as a trustee, which generally means it will liquidate the bank’s assets to pay its customers, including depositors and creditors.
The FDIC, an independent government agency that insures bank deposits and oversees financial institutions, said all insured depositors will have “full access” to their insured deposits by Monday morning, and will pay uninsured depositors a “dividend anticipated within the next week”.
The FDIC took over mid-morning Friday; usually wait until the markets close.
“SVB’s condition deteriorated so quickly that he couldn’t last just five more hours,” Better Markets CEO Dennis M. Kelleher wrote. “That’s because their depositors were withdrawing their money so fast that the bank became insolvent and an intraday shutdown was inevitable due to a classic bank run.”
High interest rates led to its demise
To combat rampant inflation, the central bank raised interest rates from 2022. It made loans for businesses and individuals more expensive to cool the economy.
When interest rates were close to zero, banks loaded up on long-term, low-risk Treasuries. But as the Fed raises interest rates to combat inflation, the value of those assets falls, leaving banks with unrealized losses.
The high fees significantly restricted tech companies, undermining the value of tech stocks and making it harder to raise funds.
Faced with higher interest rates, a loss of IPOs and a funding drought, SVB’s clients began pulling money out of the bank.
“Higher rates have also reduced the value of its cash and other securities that SVB needed to pay depositors,” Moody’s chief economist Mark Zandi said. “All of this triggered a run on their deposits that forced the FDIC to take over SVB.”
there’s a lot to lose
US clients had at least $151.5 billion in uninsured deposits at the end of 2022, according to SVB’s latest annual report. Foreign deposits reached at least US$13.9 billion and are also not insured.
The companies may have taken out a decent amount during the bank run, but there is still a lot of money at stake if a buyer or bailout is not forthcoming.
Roku had about $487 million of his $1.9 billion in cash in Silicon Valley Bank, 26% of the company’s total. The streaming company added that most deposits were not insured. Video game site Roblox and bankrupt cryptocurrency lender BlockFi are also facing consequences.
This is not yet a banking crisis
On Thursday, billionaire hedge fund manager Bill Ackman compared SVB to Bear Stearnsthe first lender to collapse at the start of the 2007-2008 global financial crisis.
“The risk of bankruptcy and deposit losses here is that the next least capitalized bank faces a run and bust, and the dominoes continue to fall,” Ackman wrote on Twitter..
But most analysts say the SVB implosion seems company-specific for now, Julia Horowitz and Anna Cooban wrote.
Banks and lenders with a specialized clientele, like SVB, will bear the brunt of the consequences.
“The reason why [SVB está] in trouble is because they have exposure to particular industries,” said Jonas Goltermann, deputy chief economist for markets at Capital Economics. Most other banks, he added, are more “diversified.”
There is also less anxiety about the stability of the banking sector due to the major regulatory reforms implemented after the 2008 crisis.
Everyday consumers, in general, are unlikely to be affected. But the collapse is a good reminder to know where you keep your money and not keep it all in one place.
“The first bank failure since 2020 is a wake-up call for people to always make sure their money is in an FDIC-insured bank and within FDIC limits and following FDIC rules,” said Matthew. Goldberg, Bankrate analyst.
Tech companies struggle
SVB was one of the main lenders for the startup communitywhose founders now worry about getting their money out, paying payroll and covering operating expenses, Catherine Thorbecke wrote.
“Now that the bank has failed, I just want to know what happens next,” Ashley Tyrner, founder of health food delivery company FarmboxRx, told in an email. “The FDIC covers 250K, but am I going to get my full 8 figures back?”
Some are getting creative. Children’s toys, clothing and experiences retailer CAMP emailed customers Friday and announced it on its site.
“Unfortunately, we had most of our company’s cash assets in a bank that failed. I’m sure you’ve heard the news. She urged customers to use the code BANKRUN to save 40% on all merchandise (or pay full price, which she said would be appreciated).
Other lenders suffer
Lenders somewhat similar to SVB find themselves in an unfortunate situation.
Cryptocurrency lender Silvergate said it will shut down operations and liquidate the bank after taking a financial hit from the turmoil in digital assets.
“In light of recent industry and regulatory developments, Silvergate believes that an orderly winding down of the Bank’s operations and a voluntary liquidation of the Bank is the best way forward,” it said in a statement on Wednesday.
But the risks of a broader contagion are thought to be limited for now.
“Overall, the banking system is in good shape and capable of withstanding significant shocks,” said Jens Hagendorff, professor of finance at King’s College London. “I think SVB is special in that it has a fickle depositor base.”
Stocks tumbled on Friday
The Dow fell 345 points, or 1.1% on Friday. The S&P 500 fell 1.5% and the Nasdaq Composite was down 1.8%.
For the week, the Dow fell 4.4%, its worst week since June. The S&P 500 was down 4.6% and the Nasdaq was down 4.7%.
Traders work on the floor during morning trading on the New York Stock Exchange (NYSE) on March 10, 2023 in New York City. (Photo by Spencer Platt/Getty Images)
Wall Street’s fear gauge, the VIX, rose 15% on Friday afternoon as investors scrambled for safe haven to avoid being sucked into any contagion from the banking sector, the markets team reported.
Politicians call for accountability
Democratic Sen. Elizabeth Warren has called on authorities to crack down on Silicon Valley Bank’s management following the bank’s historic bankruptcy, ‘s Matt Egan reported. She is a strong supporter of strict bank supervision.
“SVB executives must be held accountable for any misappropriation or mismanagement that led to this failure,” Warren said in a statement late Friday.
The Massachusetts Democrat said she gets regular updates from the FDIC, which has taken control of the bank, which has 17 branches in California and Massachusetts.
“I hope there will soon be a better assessment of how much help is available to clients in Massachusetts and across the country,” Warren said.
‘s Matt Egan contributed to this report.
