US regulators shut down Silicon Valley Bank on Friday in a spectacular move that sent global banking shares into turmoil, as markets fretted over possible contagion from the biggest banking failure since the 2008 financial crisis.
US authorities swooped in and seized the assets of SVB bank, a key lender to US startups since the 1980s, after a run on deposits made it no longer tenable for the medium-sized lender to stay afloat on its own.
Headquartered in the shadow of the world’s biggest tech companies, SVB’s travails have raised fears that more banks may face doom as the fallout from high inflation and hiked interest rates squeezes weaker lenders.
A day after the four biggest US banks lost a whopping $52 billion in market value following signs of trouble at SVB, European banking giants were similarly mired in the red, with Deutsche Bank down 10 percent at one stage.
On Wall Street on Friday, shares in heavyweights Bank of America, Wells Fargo and Citibank seesawed, with US Treasury Secretary Janet Yellen expressing “concern” about the situation and saying she was “monitoring” a few banks.
This was swiftly followed by news that the California Department of Financial Protection and Innovation (DFPI) closed SVB and appointed the Washington-based Federal Deposit Insurance Corporation to take over the funds.
The crisis measure protects customers with up to $250,000 in deposits and crucially buys time to find a potential buyer of whatever remains of the embattled Silicon Valley lender.
CNBC reported Friday that SVB was in talks with potential buyers after attempts to ride out the crisis on its own failed.
“The debate today is whether SVB issues are SVB’s issues or the start of a bigger issue for the banking sector,” said a note from Patrick O’Hare of Briefing.com.
“There seems to be an allowance in the stock market for it being more of a company-specific problem or at least not a debilitating systemic issue.”
Before the closure, trading in SVB itself was halted Friday after the bank saw more than 60 percent of its value wiped out, following the disclosure it had lost $1.8 billion in securities sales in an effort to raise funds.
Investors fear that other banks could face similar losses as they look to raise cash amid ever rising interest rates with central banks moving aggressively to tame decades-high inflation.
“We’ll have to see how this story develops but something always breaks hard during or after a Fed hiking cycle,” Deutsche Bank analysts said in a note.
“Is this another mini wobble on this front or the start of something bigger? Tough to tell, but I would be stunned if there weren’t many more casualties of this boom-and-bust cycle.”
What is Silicon Valley Bank?
Silicon Valley Bank, founded in 1983, grew rapidly with the explosion of businesses in the tech-focused region, eventually expanding to more than a dozen states and countries including Israel, Ireland and Germany. Before its failure, it ranked as the 16th largest bank in the country, holding $210 billion in assets.
Silicon Valley Bank offers business lending products such as loans to help finance acquisitions or projects, touting on its website that it "helps businesses at every stage." The bank also provides private banking services and other financial products.
Why was it closed by regulators?
The California Department of Financial Protection and Innovation on Friday said it has taken possession of Silicon Valley Bank. The reason, it said, was "inadequate liquidity and insolvency."
What happens to depositors and clients?
The FDIC said it created a new institution, the Deposit Insurance National Bank of Santa Clara (DINB), and that it had immediately transferred all insured deposits at Silicon Valley Bank to the new bank. All insured depositors will have access to their insured deposits by Monday morning, March 13, the FDIC said in a statement.
Meanwhile, uninsured depositors will receive "an advance dividend within the next week," as well as a receivership certificate for the remaining amount of their uninsured funds.
The main office and its 17 branches will reopen for business on March 13, the FDIC said.
"Banking activities will resume no later than Monday, March 13, including on-line banking and other services," the agency said. "Silicon Valley Bank's official checks will continue to clear."
The standard insurance from FDIC covers $250,000 for each depositor per insured bank. That limit is also per ownership category, such as single accounts or retirement accounts, so one person may have assets with insurance coverage that exceeds $250,000, the FDIC says.
What are bank customers saying?
One Silicon Valley Bank client, FarmboxRx CEO Ashley Tyrner CEO, told CBS MoneyWatch that the events of the last 24 hours have "been nothing short of shocking."
Tyrner, whose company works with health care plans to deliver food to underserved communities, said she was surprised to learn about the financial challenges facing Silicon Valley Bank.
"By the time we began seeing articles it was already a full-swing bank run," Tyrner said in an email. "It seems that while the venture capital circle was publicly boasting their support for SVB in attempt to stabilize the panic, they were calling their portfolio companies behind closed doors telling them to move funds immediately."
She said her company wasn't able to log into its accounts and that the bank's help line had a "disconnected" message or hung up. "[N]one of our account reps would respond to calls or emails," she added.
Tyrner said she plans on moving the remaining funds in the account once she regains access to it.
Why did the bank collapse?
On March 8, Silicon Valley Bank parent SVB Financial Group said that it was taking "strategic actions," including selling almost all of its available-for-sale securities — $21 billion in bonds. It also said it planned to issue stock as part of the plan to raise capital and strengthen its finances.
SVB, which noted that it would take a $1.8 billion loss on the bond sales, said it needed to take the steps because of higher interest rates and "elevated cash burn levels" by customers. The company also pointed to "pressured public and private markets."
The bank's heavy exposure to the tech sector played a part in its downfall, noted Chenxi Wang, founder and general partner of Rain Capital, in an email. Some of its tech company clients were burning through cash faster than expected in early 2023, Silicon Valley Bank said in its March 8 investor letter. That resulted in lower deposits than forecast, according to the bank.
Silicon Valley Bank's problems were exacerbated by rapidly rising interest rates over the last year, which reduced the value of its bond holdings.
"The bank also made balance sheet management errors by putting too much money into long-term bonds, which became a problem when interest rates surged," Wang said. That "caused non-trivial panic."
The March 8 announcement spooked investors, sparking concerns that clients would yank funds due to the bank's financial uncertainty, which in turn would limit the bank's ability to tap other liquidity sources, said Brandon King, an analyst at Truist, in a note to investors.
"The stock reaction today is evident of concerns around the bank's liquidity," King said.
What are tech investors saying?
Prior to California's decision to shutter the bank, the reaction within Silicon Valley ranged the gamut, with Founders Fund, a venture capital firm co-founded by Peter Thiel, advising companies to take their money out of the bank, Bloomberg News reported.
But others had urged companies and clients to stay put, such as Two Sigma Ventures investor Villi Iltchev, an investor, who wrote on Twitter that Silicon Valley Bank deserved support. "SVB is the most important capital provider to tech startups and the biggest supporter of the community. Now is the time to support them," tweeted Villi.
The question was whether clients would opt to remain with the bank or trigger a classic bank run. Fears about an institution's possible insolvency can become self-fulfilling if enough customers pull their money out of the bank.
"Banks are not like normal companies, and one in crisis can't wait to run a normal auction process — they depend on the confidence of depositors and even an inkling of doubt can snowball faster than nearly anyone imagines, impairing the value of the franchise," wrote Wall Street analyst Adam Crisafulli of Vital Knowledge in a report.
How is this impacting Wall Street and other banks?
Other bank stocks fell Thursday as Silicon Valley Bank shares swooned. Banks lost a total of about $100 billion in market value over the last two days, according to Reuters.
Still, analysts said that Silicon Valley Bank's woes are unlikely to ripple through the banking industry as a whole.
"Current pressures facing SIVB are highly idiosyncratic and should not be viewed as a read-across to other banks," Morgan Stanley analysts Manan Gosalia and Betsy Graseck wrote in a note Friday, according to CNBC.
Silicon Valley Bank could yet impact a major part of the U.S. economy in that tech companies could lose a valuable source of financing, noted Bill Ackman, CEO of hedge fund Pershing Square, on Twitter.
"The failure of [Silicon Valley Bank] could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash," he noted.
On Friday, large, diversified banks such as Bank of America and JPMorgan Chase pulled out of an early slump due to data released Friday by the Labor Department.
Regional banks, particularly those with heavy exposure to the tech industry, were in decline. Yet it has been a bruising week, with shares of major banks are down this week between 7% and 12%.
