Silicon Valley Bank shut down in stunning $300 billion collapse
One of America’s biggest banks has collapsed and been taken over by the government in the biggest financial crisis since the GFC.
One of the largest banks in the US has spectacularly collapsed after it faced a bank run with customers scrambling to withdraw their cash.
Silicon Valley Bank (SVB), based near San Jose, closed its doors on Friday after the California state government and US federal government stepped in after fears it woes could spread to the rest of the banking sector.
It’s the biggest bank failure in the US since 2008 when Washington Mutual collapsed in the middle of the global financial crisis.
The New York Post reported that on Friday morning building managers at Silicon Valley Bank’s Manhattan branch reportedly called the police after a group of tech founders showed up and attempted to pull out their cash.
SVB is the 18th largest bank in the US with a market capitalisation of around $40 billion, making it only around a fifth smaller than Australia’s ANZ Bank. It had total assets of more than $300bn.
The company, which specialises in providing financial services to the tech sector including big names like Pintrest and Shopify, has spent more than 48 hours in crisis mode after it tried to cover plummeting customer deposits.
Its shares were down 60 per cent in pre market trading Friday prompting regulators to step in.
The California Department of Financial Protection and Innovation (DFPI) closed SVB and appointed the Federal Deposit Insurance Corporation as receiver of the funds, the FDIC said on Friday.
The move will protect customers with up to $377,000 in deposits and buy time to find a potential buyer of the embattled Silicon Valley lender.
The DFPI “has taken possession of Silicon Valley Bank, citing inadequate liquidity and insolvency,” the California agency said.
SVB’s 17 branches will physically reopen on Monday under control of the Deposit Insurance National Bank of Santa Clara (DINB), a new entity set up by the FDIC.
“DINB will maintain Silicon Valley Bank’s normal business hours,” the FDIC said.
“Banking activities will resume no later than Monday, March 13, including online banking and other services.”
SVB is the first federally insured institution to fail since 2020, the FDIC said.
The SVB crisis sparked a sell-off in European bank shares and volatility in US bank shares.
Investors fear that other banks could face similar losses amid financial fallout from rising interest rates with central banks moving aggressively to tame decades-high inflation.
Present in the United States, Europe, Asia and Israel, SVB offered a range of financial services to start-ups, from simple bank accounts to advisory services on how to attract investments, as well as private banking and wealth management.
SVB boasted on its website, which was still up on Friday, that around half of all US venture capital-backed tech and life sciences companies were its clients.
Problems at SVB
The parent company of the commercial bank, SVB Financial Group had announced on Wednesday that it would try to raise $3.8 billion in fresh funds through a share offering, after having sold off $32 billion in securities at a loss of $2.7 billion.
The bank was trying to raise funds to confront a surge in withdrawals by clients.
According to sources to financial magazine Bloomberg, investment funds were advising their clients to withdraw their funds from SVB, worsening the situation for the bank.
SVB chief executive Greg Becker sought to reassure customers about the bank’s financial health on Thursday, The Wall Street Journal reported, citing people familiar with the matter.
The newspaper said Mr Becker urged them against pulling their deposits from the bank and to not spread fear or panic about its situation.
SVB’s focus on the tech industry made it vulnerable to the deteriorating conditions for the sector: the sharp increase in interest rates and a weakening risk appetite among investors plus continued supply chain problems.
After more than a decade of relentless growth, the stock market capitalisation of tech companies tumbled last year and they announced tens of thousands of lay-offs.
Banks have also been impacted by the increase in interest rates. While higher interest rates are generally good for banks as they can earn more from lending, a lot depends on the rate they have to pay to acquire funds.
Short-term interest rates are currently higher than long-term interest rates in the United States, squeezing weaker banks and complicating investments.
The misfortune of one bank can affect the confidence of investors in the entire sector across the globe.
The interdependence of banks was driven home by the 2008 collapse of Lehman Brothers, which is widely considered the trigger for the global financial crisis.
SVB shows that bank runs, the self-fulfilling panic by depositors to withdraw their cash in the fear that a bank will collapse, remain very much a threat in today’s world despite bank regulation.
For analyst Christian Parisot, “the question now is which other banks could be under pressure” because of the squeeze on interest rates, he said in a note for the brokerage Aurel BGC.
He added that “the banking risk remains limited to very small banks and a limited number” of 10 or so US regional banks.
But top hedge fund manager Bill Ackman compared the bank’s troubles to the plight of Bear Stearns, the first domino to fall in the global financial crisis 15 years ago.
“That is why government intervention should be considered,” he tweeted.
— with AFP
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