The Collapse of Silicon Valley Bank

Silicon Valley Bank collapsed Friday morning, capping up a dramatic 48-hour period in which a bank run and a capital crisis resulted in the second-largest financial institution failure in American history.

California officials shut down the tech lender and transferred it to the US Federal Deposit Insurance Corporation. The FDIC is acting as a receiver, which means it will liquidate the bank's assets in order to repay its clients, including depositors and creditors.

The FDIC, an independent federal body that guarantees bank deposits and regulates financial institutions, has stated that all insured depositors would have full access to their protected savings by Monday morning. It stated it will pay an "advance dividend" to uninsured depositors "within the following week."

SVB Financial Group, which formerly operated the bank, is yet to make a statement.

Silicon Valley Bank headquarters. Photo by Bloomberg

What transpired?

On Wednesday, SVB reported that it had sold a variety of assets at a loss and that it would issue $2.25 billion in additional shares to shore up its balance sheet. This apparently caused fear among prominent venture capital firms, which encouraged companies to withdraw their funds from the bank.

On Thursday, the company's shares plummeted, bringing other banks down with it. SVB's shares had been stopped by Friday morning, and the company had abandoned efforts to immediately raise funds or find a buyer. Several additional bank equities, including First Republic, PacWest Bancorp, and Signature Bank, were temporarily halted on Friday.

The FDIC's takeover was notable for its mid-morning scheduling, since the agency generally waits until the market has closed before intervening.

“SVB’s condition deteriorated so quickly that it couldn’t last just five more hours,” Better Markets CEO Dennis M. Kelleher wrote. “That’s because its depositors were withdrawing their money so fast that the bank was insolvent, and an intraday closure was unavoidable due to a classic bank run.”

The collapse of Silicon Valley Bank is due in part to the Federal Reserve's aggressive interest rate rises over the last year.

Banks piled into long-dated, presumably low-risk Treasuries while interest rates were near zero. Yet, as the Fed raises interest rates to combat inflation, the value of such assets has decreased, leaving banks with unrealized losses.

Rising interest rates hit tech particularly hard, undermining the value of tech stocks and making it difficult to raise financing, according to Moody's senior economist Mark Zandi. As a result, numerous technology companies used their SVB accounts to support their operations.

“Higher rates have also lowered the value of their treasury and other securities which SVB needed to pay depositors,” Zandi said. ” All of this set off the run on their deposits that forced the FDIC to takeover SVB.”

After the abrupt collapse of SVB, Deputy Treasury Secretary Wally Adeyemo attempted to reassure the public about the soundness of the banking sector on Friday.

“Federal regulators are paying attention to this particular financial institution and when we think about the broader financial system, we’re very confident in the ability and the resilience of the system,” Adeyemo told reporters from the American television channel CNN in an exclusive interview.

The remarks came as Treasury Secretary Janet Yellen summoned an impromptu meeting of banking regulators to investigate the failure of Silicon Valley Bank, a key lender to the struggling technology industry.

“We have the tools that are necessary to [deal with] incidents like what’s happened to Silicon Valley Bank,” Adeyemo said.

Adeyemo stated that US officials are "collecting more information" concerning Silicon Valley Bank's demise. He said that the Dodd-Frank financial reform package, brought into law in 2010, provided regulators with the tools they needed to handle this and enhanced bank capitalisation.

Adeyemo declined to speculate on the larger economy or the IT industry's influence, if any.

Reminiscences of 2008

Despite early alarm on Wall Street at the run on SVB, which led its shares to plummet, analysts said the bank's demise is unlikely to trigger the type of domino effect that gripped the banking industry during the financial crisis.

“The system is as well-capitalized and liquid as it has ever been,” Zandi said. “The banks that are now in trouble are much too small to be a meaningful threat to the broader system.”

According to Ed Moya, senior market analyst at Oanda, smaller banks that are disproportionately connected to cash-strapped industries like IT and crypto may be in for a hard ride.

“Everyone on Wall Street knew that the Fed’s rate-hiking campaign would eventually break something, and right now, that is taking down small banks,” Moya said.

“Idiosyncratic scenario”

While largely obscure outside of Silicon Valley, SVB was one of the top 20 American commercial banks at the end of last year, with $209 billion in total assets, according to the FDIC.

It is the largest lender to go bankrupt since Washington Mutual in 2008.

The bank collaborated with roughly half of all venture-backed IT and health care businesses in the US, many of whom withdrew their deposits from the bank.

Wells Fargo senior bank analyst Mike Mayo believes the SVB problem is "an idiosyncratic scenario."

“This is night and day versus the global financial crisis from 15 years ago. Back then, banks were taking excessive risks, and people thought everything was fine. Now everyone’s concerned, but underneath the surface, the banks are more resilient than they’ve been in a generation.”

Rate hikes and their consequences

SVB's precipitous drop matched other hazardous investments that have been revealed in the market's turbulence over the last year.

Silvergate, a crypto-focused lender, said Wednesday that it is closing down operations and would dissolve the bank after being financially hammered by the instability in digital currencies. Another lender, Signature Bank, was heavily impacted by the bank selloff, with shares falling 30% before being suspended for volatility on Friday.