Silicon Valley Bank Fails After Failing to Raise Capital

The Bank of Silicon Valley collapsed on Friday morning, after a staggering 48 hours in which a bank run and a capital crisis led to the second-largest financial institution failure in US history.

California regulators closed the technology lender and placed it under the control of the US Federal Deposit Insurance Corporation. The FDIC is acting as a receiver, which typically means it will liquidate the bank’s assets to pay its customers, including depositors and creditors.

The FDIC, an independent government agency that insures bank deposits and oversees financial institutions, said all insured depositors will have full access to their insured deposits by Monday morning. He said he would pay uninsured depositors an “early dividend next week”.

The bank, formerly owned by SVB Financial Group, did not respond to CNN’s request for comment.

What happened?

Silicon Valley Bank’s decline stems in part from the Federal Reserve’s aggressive interest rate hikes last year.

After years of interest rates hovering around zero, the central bank last spring launched a series of historic rate hikes to make borrowing for businesses and individuals more expensive – a way to cool the economy and control inflation.

The higher rates have hit tech hard, reducing the value of tech stocks and making fundraising more difficult, said Moody’s Chief Economist Mark Zandi. This has led many tech companies to withdraw the deposits they held at SVB to fund their operations.

“Higher rates also reduced the value of its treasury and other securities that SVB needed to pay depositors,” Zandi said. “All of this triggered a run on their deposits that forced the FDIC to acquire SVB.”

echoes of 2008

Despite Wall Street’s initial panic over the run on SVB, which sent its stock plunging, analysts said the bank’s collapse was unlikely to trigger the kind of domino effect that gripped the banking sector during the financial crisis.

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

But smaller banks that are disproportionately tied to cashless sectors like tech and crypto could face a tough spot, according to Ed Moya, senior market analyst at Oanda.

“Everyone on Wall Street knew the Fed’s rate hike campaign would eventually break something, and now it’s bringing down small banks,” Moya said.

Stock drops for second day

Though relatively unknown outside of Silicon Valley, SVB was among the top 20 largest US commercial banks with $209 billion in total assets at the end of last year, according to the FDIC.

It is the biggest creditor to fail since the collapse of Washington Mutual in 2008.

The bank has partnered with nearly half of all venture capital-backed technology and healthcare companies in the United States, many of which have withdrawn deposits from the bank.

Shares in SVB halted on Friday morning after falling more than 60% in premarket trading. Shares tumbled 60% on Thursday after the bank said it had to sell a portfolio of US Treasuries and $1.75 billion in stocks at a loss to cover rapidly falling customer deposits – essentially grappling with a run on the bank.

Several other bank stocks were temporarily halted on Friday, including First Republic, PacWest Bancorp and Signature Bank.

By Friday, the panic seemed to subside. Bank stocks remained lower but stable.

Mike Mayo, a senior banking analyst at Wells Fargo, said the SVB crisis could be “an idiosyncratic situation.”

“This is night and day compared to the global financial crisis 15 years ago,” he told CNN’s Julia Chatterly on Friday. Back then, he said, “Banks were taking excessive risks and people thought it was okay. Now everyone is worried, but under the surface the banks are tougher than ever.”

Rate increases take a bite