U.S. regulators on Friday (March 10) made an emergency seizure of assets from Silicon Valley Bank, the largest financial institution since Washington Mutual collapsed at the height of the financial crisis more than a decade ago bankruptcy event.
Silicon Valley Bank is the 16th largest bank in the United States, and its depositors are mainly practitioners in the technology industry and venture capital-backed companies. The bank collapsed after depositors rushed to withdraw their funds due to concerns about the bank’s balance sheet. It was the second largest bank failure in U.S. history, after Washington Mutual.
Silicon Valley Bank’s focus on the tech sector means it’s unlikely to have a knock-on effect across the banking industry like it did more than a decade ago. The biggest banks — the ones most likely to cause systemic economic problems — have healthy balance sheets and ample capital.
The subprime mortgage crisis in 2007 started in the United States and spread to Asia and Europe, triggering the biggest financial crisis since the Great Depression and affecting the whole world. The panic on Wall Street led to the collapse of Lehman Brothers, the famous investment bank founded in 1847. The chain reaction across the global financial system has caused millions of jobs to be lost due to the close ties between the major banks.
The banking sector has been on edge throughout the past week, with the Silicon Valley Bank debacle sending shares of nearly every financial institution lower on Friday, with shares down double digits since Monday.
Silicon Valley Bank has collapsed at such an incredible pace that some industry analysts were still saying on Friday that it was a good company and could still be a smart investment. Silicon Valley Bank executives were also trying to raise capital and find more investors early Friday morning. However, trading in the bank’s shares was halted ahead of the opening on Wall Street amid wild swings in the share price.
Shortly before noon ET, the Federal Deposit Insurance Corporation moved to shut down the bank. Notably, the FDIC did not wait until the close of business for the day to take over the banks, which is typical of the orderly closure of financial institutions. The FDIC was unable to immediately find a buyer for the bank’s assets, showing how quickly depositors were withdrawing money. The bank’s remaining uninvested deposits will now be frozen in receivership.
The FDIC said the bank had total assets of $209 billion at the time of its collapse. It was not immediately clear how many of its deposits exceeded the $250,000 insurance limit, but previous regulatory reports indicated that most of the bank’s deposits were above that limit.
Deposits below the $250,000 limit will be available Monday morning, the FDIC said Friday.
Silicon Valley Bank, which had looked solid this year, announced plans on Thursday to raise as much as $1.75 billion to bolster its capital position. That sent investors back in a hurry, sending shares plunging 60% and falling further on Friday ahead of the Nasdaq open.
As its name suggests, Silicon Valley Bank is a major financial channel for the Silicon Valley technology industry. Hundreds of companies have their working capital deposited with the bank, and it is seen as good business sense to have a relationship with SVB if company founders want to find new investors or go public.
Ashley Turner, chief executive of health company FarmboxRx, said: “Given the influence of SVB, we thought it was a logical step to form a relationship with SVB.” Although Turner has funds at other banks that can payroll, but she says a significant portion of her company’s profits is now locked up in Silicon Valley Bank.
Tech stocks, which have soared during the COVID-19 pandemic, have been hammered over the past 18 months, with layoffs across the industry. Silicon Valley Bank’s ties to the tech industry quickly became a liability.
Meanwhile, the bank has been hit hard by the Federal Reserve’s fight against inflation and a series of aggressive rate hikes.
As the Fed raised its benchmark interest rate, the value of the bonds began to fall. That’s usually not a problem because the downturn simply results in “unrealized losses” that don’t count against capital buffers banks can use in the event of a future downturn.
However, when depositors became anxious and started withdrawing their money, banks sometimes had to sell those bonds before they matured to make up for the flight.
That’s exactly what happened to Silicon Valley Bank, which lost $1.8 billion as it had to sell $21 billion of highly liquid assets to deal with deposit flight.
Tyner said she has spoken to several friends who are backed by VCs. She described her friends as “crazy” over the collapse of Silicon Valley Bank. Tyner’s chief operating officer tried to withdraw the company’s funds on Thursday but was unable to do so.
“A friend cried when they said they couldn’t get paid today and had to notify 200 employees,” Tyner said.
