Silicon Valley Bank collapsed Friday with financial regulators rushing in to seize control over the tech-focused lender’s assets and liabilities following a frenetic week that saw an unsuccessful attempt to raise capital triggering a depositor exodus.
The California Department of Financial Protection and Innovation closed down the bank and appointed the Federal Deposit Insurance Corp. (FDIC) in charge of the lender’s deposits. The FDIC created the Deposit Insurance National Bank (DINB) of Santa Clara and immediately transferred all insured deposits of SVB to the DINB at the time of closing.
The FDIC in the announcement said that insured depositors will have access to their deposits no later than Monday morning. Under FDIC’s standard insurance coverage, depositors are covered for up to $250,000 per account holder and per insured bank. Regarding uninsured depositors, the FDIC said they will receive a receivership certificate for the remaining amount of their uninsured funds and will pay uninsured depositors an advanced dividend within the next week, with potential future dividend payments “may be made” as regulator sells SVB’s assets.
The implosion of SVB, which catered mainly to the tech start-ups and venture-capital industry comes after the bank surprised investors in announcing Wednesday its plans to shore up its balance sheet by launching a share sale after selling $21 billion of its long-term treasuries and mortgage-backed securities bond holdings. The fire sake dump of SVB’s long-term securities caused the bank to take a $1.8 billion loss in unrealized losses on its balance sheet.
Just days before SVB’s collapse, FDIC Chairman Martin Gruenburg warned a gathering of finance lobbyists that a ticking time bomb was lurking within the U.S. banks industry, expressing concern about staggering “paper” losses in banks’ balance sheets that could pose a bigger risk in lender’s “ability to meet unexpected liquidity needs.” Banks became vulnerable to the Federal Reserve’s aggressive supersize rate hikes that began in early 2022 creating a widening gap between the value of the lenders’ existing bonds they hold and the current value those bonds yield in the market. By the end of 2022, banks were sitting on a total of $620 billion in unrealized losses (assets that have decreased in value price but have not been sold).
“The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies,” Gruenburg said in remarks at the Institute of International Bankers. “As a result of the higher interest rates, longer-term maturity assets acquired by banks when interest rates were lower are now worth less than their face values.”
“Most banks have some amount of unrealized losses on securities. The total of these unrealized losses, including securities that are available for sale or held to maturity, was about $620 billion at year-end 2022,” Gruenberg added. “Meaningful deposit outflows have not yet materialized, but banks will need to watch these trends carefully as the interest rate environment evolves.”
2021 was a year of the tech investing boom, resulting in SVB being awash in “excess liquidity” in assets and deposits to the mark of $330 billion. The tech-lender firm opted to pile the majority of customer deposits into long-dated mortgage-backed securities, an investment method banks take to shore up the next decade’s balance sheet. Many financial institutions are big investors in assets such as Treasury bills because they need lots of safe places to park their cash during a period of historically low-interest rates. As banks began taking in tons of new deposits and lending regulations were somewhat restrained, SVB would lock away half of its customer deposits — $91 billion of those assets being parked into government-issued mortgage-backed securities as interest rates remained near zero.
However, many banks failed to account for the Fed hiking rates at a rapid clip, a problem that lowered the value of their existing bonds. In the case of SVB, it appeared to prepare for the double-whammy — rising rates hitting its bonds and falling venture capital investment levels that would force its hand.
After Silicon Valley’s CEO Greg Becker disclosed it would take a $1.8 billion fire share hit loss, citing “elevated cash-burn levels” and sought to raise $2.25 billion in fresh equity to cover the new losses by shoring up capital in selling a mix of common and preferred stock. The news would spook venture capitalists and VC firms including Coatue and Peter Thiel’s Founders Fund, who all advised their startup companies that they should pull their money from SVB while others like Sequoia Capital, urged diversification.
The abrupt Twitter-triggered mass panic led to customers attempting to withdraw their funds in droves with Thursday alone seeing nearly $42 billion — a quarter of SVB’s total deposits withdrawn. The flood of withdrawals spurred a liquidity squeeze and destroyed the lender’s finances, with the close of Thursday’s business seeing SVB ending with a negative cash balance of $958 million, making the bank’s financial condition insolvent.
The rapid panic-induced bank run of deposits complicated effort plans to raise capital and a failed potential sale of SVB. Deposit outflows were outpacing the sale process, causing a very difficult task for a realistic assessment of the bank’s health. SVB’s core business is centered on banking deposits of tech start-ups’ cash deposits along with lending to venture capital and private equity firms that backs those companies.
On Thursday, the shares of parent company SVB Financial Group tanked 60.4% or $161.79, hitting their lowest level since September 2016 and leading the whole market into its biggest sell-off of 2023. The 60% wipe-out of SVB shares marked the stock’s biggest one-day wipeout in history. It would evaporate over $80 billion in market value from 18 banks making up the S&P 500 bank index, with the top four big U.S. banks — JP Morgan Chase, CitiGroup, Bank of America, and Wells Fargo would lose a combined $52 billion in market value. The KBW Nasdaq Bank index marked its biggest decline in almost three years.
SVB’s stocks continued to plunge in premarket trading Friday before being halted ahead of the market’s bell to stop the free fall. The shares of SVB never reopened for trading and would remain closed before regulators would step in to take control of the 40-year-old tech-friendly bank.
SVB collapse would bring fears that a ripple effect would emerge similar to the 2008 banking crisis, causing the broader banking sector to continue dropping double digits.
The news of SVB being shuttered by regulators occurred before Treasury Secretary Janet Yellen was testifying on President Biden’s FY 2024 Budget to the House Ways and Means Committee. During her testimony, Yellen noted that the Treasury Dept. was “monitoring very carefully” developments of a few banks amid Thursday’s selloff.
As of December 31, 2022, SVB had roughly $209 billion in total assets and $175.4 billion in total deposits. The bank’s total assets worth marked it the 16th-largest bank in the U.S., which served nearly half of its clients being in the venture-backed U.S. tech, tech start-ups, and life science companies. According to FDIC, at the time of closing, it is unknown the amount of those deposits exceeded the $250,000 insurance limit
SVB Financial became the second-largest FDIC-insured commercial bank to fail in U.S. history since the 2008 financial crisis. The last U.S. bank failure of this size was Washington Mutual in 2008, which had $307 billion in assets.2008 Financial CrisisBank CollapseEconomic NewsFDICFederal ReserveGreg BeckerJanet YellenMartin GruenburgSilicon Valley BankStock Market