Silicon Valley Bank is largest failure since 2008 crisis, billions stranded

David French, Echo Wang, and Alun John

(Reuters) – Startup-focused lender SVB Financial Group became the largest bank to fail since the 2008 financial crisis on Friday, in a sudden collapse that roiled global markets, left billions of dollars belonging to companies and investors stranded.

California’s banking regulators shut down the bank that did business under the name Silicon Valley Bank on Friday. They also appointed the Federal Deposit Insurance Corporation as receiver to dispose of the assets.

Based in Santa Clara, the lender was ranked as the 16th biggest in the U.S. at the end of last year, with about $209 billion in assets. Although details surrounding the bank’s sudden collapse are unclear, it is clear that the Fed’s aggressive interest-rate hikes in 2012, which had crimped financial condition in the start up space where it was a major player, were front and center.

It tried to raise capital in order to offset the fleeing deposits but lost $1.8 billion on Treasury Bonds whose values were destroyed by Fed rate hikes.

Silicon Valley Bank’s collapse is the biggest since Washington Mutual went bankrupt in 2008. This was a landmark event that triggered a financial panic that crippled the economy for many years. The 2008 crash led to tougher regulations in the United States, and elsewhere.

In order to ensure that individual bank collapses don’t damage the financial system, U.S. regulators have increased capital requirements for banks.

Silicon Valley Bank’s main office and branches will reopen March 13, and all insured depositors will be able to access their insured deposits by Monday morning, according to the FDIC.

The FDIC reported that 89% of the $175 billion bank deposits were uninsured at the end of 2022.

According to people familiar, the FDIC is looking for another bank to merge with Silicon Valley Bank. The sources said that while the FDIC hopes to have a merger in place by Monday to protect unsecured deposits, there is no guarantee of a deal.

A spokesperson for FDIC did not respond immediately to a request to comment.

BUYERS WANTED

SVB Financial is the parent company to Silicon Valley Bank and works with law firm Sullivan & Cromwell and investment bank Centerview Partners to find buyers. This includes wealth manager Boston Private, equity research firm MoffettNathanson and wealth manager Boston Private. Sources said that these assets could be attractive to private equity firms and competitors.

Without SVB Financial filing for bankruptcy, it’s not clear if anyone will buy these assets. S&P Global Ratings, credit ratings agency, stated that SVB Financial would likely go bankrupt due to its liabilities on Friday.

SVB did not respond when we asked for comments.

According to Roku Inc and Roblox Corp, video game developer Roku Inc, they have hundreds of millions in bank deposits. Roku claimed that its deposits at SVB were largely uninsured which led to a 10% drop in its shares.

The bank was also worried about technology workers whose pay is dependent on them. A note was taped to the door of an SVB branch in San Francisco, advising clients to dial a toll-free number.

GRAPHIC: Silicon Valley Bank’s failure is first since 2020 (https://www.conservativenewsdaily.net/breaking-news/wp-content/uploads/2023/03/localimages/chart.png640c65cb94bf2.png)

Greg Becker, CEO of SVB Financial, sent an email to employees Friday acknowledging the “incredibly difficult” 48 hours had passed before the bank collapsed.

SVB’s problems show how an effort by the U.S. Federal Reserve to combat inflation and end the era of cheap cash is exposing market vulnerabilities. The banking sector was ravaged by the worries.

According to Reuters, U.S. banks have seen their stock market value drop by more than $100 Billion in the past two days. European banks have also lost approximately $50 billion.

U.S. lenders First Republic Bank, Western Alliance and Western Alliance announced Friday that their liquidity was strong and their deposits were still strong. This was in an effort to calm investors who lost their shares. Commerzbank, Germany, also made unusual statements to reassure investors.

MORE PAIN

As the episode raised concerns about hidden risks and the vulnerability of the banking sector to rising money costs, some analysts predict that the sector will experience more pain.

“There could be a bloodbath next week as…short sellers are out there and they are going to attack every single bank, especially the smaller ones,” Christopher Whalen is chairman of Whalen Global Advisors.

Janet Yellen, U.S. Treasury secretary, met Friday with regulators and expressed her appreciation “full confidence” Treasury stated that they are able to react to the situation.

When asked about SVB’s collapse, the White House responded that it has faith in U.S. financial regulators.

GRAPHIC: SVB stock performance month-to-date (https://www.conservativenewsdaily.net/breaking-news/wp-content/uploads/2023/03/localimages/chart_eikon.jpg)

SVB’s collapse was caused by a rising interest rate environment. SVB clients started withdrawing money as higher interest rates made it difficult for startups to get initial public offerings and more expensive for private fundraising.

SVB purchased a $21B bond portfolio mainly made up of U.S. Treasuries Wednesday and announced it would sell $2.25B in common equity and preferred convertible stocks to fund its funding gap.

Friday’s collapsed stock price made it impossible to raise capital. Sources said that the bank tried other options including a sale before regulators intervened and closed the bank.

Almena State Bank in Kansas was the last FDIC insured institution to close on Oct. 23, 2020.

(Written By John O’Donnell and Noor Zainabhussain; Additional reporting by Emma-Victoria Farr. Nathan Frandino. Jo Mason. Marc Jones. Iain Withers. Elizabeth Howcroft. Nick Zieminski. Editing: Toby Chopra. Anna Driver. William Mallard. Raju. Gopalakrishnan.