On Friday, SVB Financial Group (SIVB.O), a lender that focused on startups, suffered a sudden collapse that shook global markets and left billions of dollars belonging to companies and investors in limbo.
The bank, which operated as Silicon Valley Bank, was closed by California banking regulators who then appointed the Federal Deposit Insurance Corporation (FDIC) as the receiver responsible for handling the bank’s assets.
This event marks the largest bank failure since the 2008 financial crisis.
The lender, headquartered in Santa Clara and ranked 16th largest in the United States with around $209 billion in assets at the close of 2022, experienced a sudden collapse that left many details unclear.
However, the bank’s focus on the tech industry and the Federal Reserve’s recent aggressive interest rate hikes, which adversely affected financial conditions in the startup sector where the bank had a significant presence, were considered to be major factors contributing to its downfall.
While attempting to raise capital in response to deposit outflows, the bank suffered a loss of $1.8 billion on Treasury bonds, which were devalued due to the Federal Reserve’s interest rate hikes.
The collapse of Silicon Valley Bank marks the largest failure of a bank since the bankruptcy of Washington Mutual in 2008, which was a pivotal event that led to a financial crisis and caused significant damage to the economy for years.
This event prompted regulators to implement stricter rules and regulations for banks in the United States and beyond. As a result, U.S. banks are now required to meet more rigorous capital requirements to ensure that the failure of an individual bank will not cause damage to the broader financial system or economy.
According to the FDIC, the primary office and all branches of Silicon Valley Bank will reopen on March 13th, and all depositors with insured deposits will have full access to their funds no later than Monday morning. However, as of the end of 2022, 89% of the bank’s $175 billion in deposits were uninsured, and it is currently unclear what will happen to these funds.
To address this issue, the FDIC is urgently seeking another bank to merge with Silicon Valley Bank over the weekend to secure these uninsured deposits. However, the details of this effort are confidential, and sources familiar with the matter who requested anonymity cautioned that no deal is guaranteed to be reached by Monday.
At the time of writing, an FDIC spokesperson had not yet responded to requests for comment.
Technology workers whose paychecks relied on the bank were also worried about getting their wages on Friday. An SVB branch in San Francisco showed a note taped to the door telling clients to call a toll-free telephone number.
On Friday, SVB Financial CEO Greg Becker acknowledged the difficult 48 hours leading up to the bank’s collapse in a video message to employees. The bank’s failure highlights the vulnerabilities in the market as the campaign by the U.S. Federal Reserve and other central banks to fight inflation by ending the era of cheap money takes effect.
The banking sector has been hit hard, with U.S. banks losing over $100 billion in stock market value in the past two days, while European banks lost around another $50 billion in value, according to a Reuters calculation.
Despite this, U.S. lenders such as First Republic Bank and Western Alliance assured investors that their liquidity and deposits remained strong, while others like Germany’s Commerzbank issued unusual statements to calm investors.
The banking sector is expected to face more challenges as concerns about hidden risks and rising interest rates continue to loom. Analysts predict that short sellers will target banks, particularly smaller ones, leading to a potential bloodbath in the coming week. Christopher Whalen, chairman of Whalen Global Advisors, expressed his concerns about the situation.
Meanwhile, U.S. Treasury Secretary Janet Yellen met with banking regulators on Friday and expressed her confidence in their abilities to handle the situation. The White House also affirmed its faith and trust in U.S. financial regulators when asked about the failure of Silicon Valley Bank.
SVB’s collapse was triggered by the rising interest rate environment, which led to the closure of the IPO market for many startups and increased the cost of private fundraising.
This caused some SVB clients to withdraw their funds. In an attempt to fund the redemptions, SVB sold a $21 billion bond portfolio, mainly comprising U.S. Treasuries, on Wednesday, and planned to raise $2.25 billion through the sale of common equity and preferred convertible stock.
However, by Friday, the bank’s plummeting stock price had made it impossible to raise enough capital, and the bank tried to explore other options, including a sale, before regulators intervened and shut down the bank. The last FDIC-insured institution to close was Almena State Bank in Kansas on October 23, 2020.