Due to its inability to raise money, Silicon Valley Bank failed.
The second-largest failure of a financial institution in US history, Silicon Valley Bank, failed Friday morning after an astonishing 48 hours during which a bank run and a capital crisis took place.
The tech lender was shut down by California regulators, who then gave The Federal Deposit Insurance Corporation control of it. As receiver, the FDIC will normally sell off the bank’s assets to reimburse its clients, including depositors and creditors.
On Friday, March 10, 2023, a chart for SVB Financial Group was visible on the floor of the New York Stock Exchange in New York, USA. As well-known venture capitalists advised businesses to withdraw their money from the lender, further concerns were raised about SVB Financial Group’s financial stability and liquidity in the broader banking sector. The share price of SVB Financial Group continued to fall before being halted in premarket trading for pending news.
The failure of Silicon Valley Bank has echoes of 2008. Here’s why this time is different:
All insured depositors will have complete access to their protected deposits by no later than Monday morning, according to the FDIC, an independent federal body that insures bank deposits and regulates financial institutions. It stated that a “advance dividend will be paid to uninsured depositors during the next week.”
SVB Financial Group previously owned the bank, but it didn’t answer when CNN asked for a statement.
What took place?
When SVB disclosed on Wednesday that it had sold a number of instruments at a loss and that it would issue $2.25 billion worth of new shares to strengthen its balance sheet, the wheels began to come off. Several venture capital firms reportedly urged businesses to remove their money from the bank after that sparked a panic.
On Thursday, the company’s stock plunged, bringing down other banks with it. On Friday morning, SVB had given up trying to swiftly raise money or find a buyer and its shares were halted. Friday saw the temporary suspension of several more bank equities, including First Republic, PacWest Bancorp, and Signature Bank.
It was notable that the FDIC took control at midday rather than its usual time of after the market has closed.
“SVB’s condition deteriorated so swiftly that it couldn’t last just five more hours,” writes Better Markets CEO Dennis M. Kelleher. “That’s because the bank’s depositors were withdrawing money so quickly that the institution became insolvent, and an intraday closure was not avertable owing to a classic bank run,” the author explains.
The Federal Reserve’s rapid interest rate increases during the previous year are a contributing factor in Silicon Valley Bank’s downturn.
Banks bought a lot of long-dated, ostensibly low-risk Treasuries while interest rates were close to zero. But, the value of such assets has decreased as the Fed raises interest rates to combat inflation, leaving banks with unrealized losses.
According to Moody’s Chief Economist Mark Zandi, higher rates hit the tech industry particularly hard, reducing the value of tech stocks and making it difficult to raise money. That led a lot of Internet companies to use their SVB deposits as operating capital.
The value of their treasury and other securities that SVB needs to pay depositors has decreased as a result of higher rates, according to Zandi. All of these sparked the deposit run that compelled the FDIC to acquire SVB.
After the unexpected collapse of SVB, Deputy Treasury Secretary Wally Adeyemo sought to reassure the public on Friday about the stability of the banking system.
In an exclusive interview with CNN, Adeyemo said, “Federal authorities are keeping an eye on this specific banking institution, and when we think about the broader financial system, we’re quite confident in the ability and the resilience of the system.
The remarks follow Treasury Secretary Janet Yellen’s unexpected call for a meeting of banking regulators to investigate Silicon Valley Bank’s collapse, a significant lender to the struggling tech industry.
Adeyemo stated, “We have the instruments that are required to [handle] instances like what happened to Silicon Valley Bank.
Adeyemo claimed that US authorities are “learning more information” on Silicon Valley Bank’s demise. The Dodd-Frank financial reform legislation, which was passed into law in 2010, according to him, has given regulators the resources they need to handle this issue and increased bank capitalisation.
Adeyemo refrained from speculating on the potential effects on the tech sector or the overall economy.
Reminders of 2008
Analysts said the bank’s collapse is unlikely to trigger the kind of domino effect that gripped the banking industry during the financial crisis, despite the initial alarm on Wall Street by the run on SVB that sent its shares tumbling.
The system is as liquid and well-capitalized as it has ever been, according to Zandi. “The troubled banks are considerably too small to pose a significant threat to the larger system,”
However Ed Moya, senior market analyst at Oanda, warns that the road ahead may be difficult for smaller banks that are disproportionately dependent on cash-strapped sectors like IT and cryptocurrency.
Everyone on Wall Street understood that the Fed’s rate-hiking program would eventually break something, and tiny banks are currently suffering as a result, according to Moya.
With $209 billion in total assets at the end of last year, SVB was among the top 20 US commercial banks while being comparatively obscure outside of Silicon Valley.
Since the demise of Washington Mutual in 2008, this is the biggest lender to fail.
The bank collaborated with almost half of all venture-backed IT and healthcare businesses in the country, and many of these businesses withdrew deposits from the bank.
Wells Fargo senior bank analyst Mike Mayo suggested that the SVB crisis may be “an idiosyncratic circumstance.”
He told CNN’s Julia Chatterly on Friday, “This is sea and day from the global financial crisis from 15 years ago. “Banks were taking unnecessary risks back then, and people felt everything was alright,” he remarked. Although everyone is worried right now, the banks are more resilient than they have been in a generation.
Rate increases hurt.
SVB’s abrupt decline matched other hazardous wagers that were exposed during the market upheaval of the previous year.
Silvergate, a lender with a concentration on cryptocurrencies, announced on Wednesday that it is closing its doors and would liquidate the bank after being severely damaged financially by the upheaval in digital assets. Another lender, Signature Bank, suffered greatly from the bank sell-off; its shares fell 30% before being suspended for volatility on Friday.
The Silicon Valley Bank logo seen on a smartphone screen, March 10, 2023, in Riga, Latvia. As concerns about Silicon Valley Bank’s financial stability mounted, panic erupted among startups.
Silicon Valley Bank’s failure causes tech businesses to struggle.
SVB’s institutional difficulties “mirror a wider and more pervasive systemic issue: The banking industry is sitting on a ton of low-yielding assets that, thanks to the recent year of rate increases, are now well underwater – and sinking,” writes Konrad Alt, co-founder of Klaros Group.
As of the end of 2022, according to Alt, rate increases “essentially wiped out nearly 28% of all the capital in the banking industry.”