Silicon Valley Bank collapses, second largest fall in US history

The SVB collapsed in the second-biggest bank failure in US history after a run on deposits doomed plans to raise fresh capital.

A Brinks armoured truck sits parked in front of the shuttered Silicon Valley Bank (SVB) headquarters. Picture: Getty Images via AFP.

Silicon Valley Bank collapsed Friday in the second-biggest bank failure in US history after a run on deposits doomed the tech-focused lender’s plans to raise fresh capital.

The Federal Deposit Insurance Corp. said it has taken control of the bank via a new entity it created called the Deposit Insurance National Bank of Santa Clara. All of the bank’s deposits have been transferred to the new bank, the regulator said.

Insured depositors will have access to their funds by Monday morning, the FDIC said. Depositors with funds exceeding insurance caps will get receivership certificates for their uninsured balances.

Once a darling of the banking business, Silicon Valley Bank collapsed at warp speed after it announced a big loss on its bondholdings and plans to shore up its balance sheet, tanking its stock and sparking widespread customer withdrawals.

The bank is the 16th largest in the U.S., with some $209 billion in assets as of Dec. 31, according to the Federal Reserve. It is by far the biggest bank to fail since the near collapse of the financial system in 2008, second only to the crisis-era shutdown of Washington Mutual Inc.

The bank’s parent company, SVB Financial Group, was racing to find a buyer after scrapping a planned $2.25 billion share sale Friday morning. Regulators weren’t willing to wait. The California Department of Financial Protection and Innovation closed the bank Friday within hours and put it under the control of the FDIC.

Greg Becker, President and CEO of Silicon Valley Bank (SVB). Picture: AFP.

SVB, based in Santa Clara, Calif., earlier this week surprised investors by announcing that it lost nearly $2 billion selling assets following a larger-than-expected decline in deposits. The stock has lost more than 80 per cent since then, and tech clients rushed to pull their deposits over concerns about the bank’s health.

The bank’s troubles have dragged down the entire industry. The four largest U.S. banks lost some $52 billion in market value Thursday, and a broader index of bank stocks had its worst day in nearly three years. Bank stocks continue to plunge Friday morning, with a number halted for volatility.

Bankers at Goldman Sachs Group Inc. had arranged for SVB to sell shares at $95 apiece on Thursday afternoon, according to people familiar with the offering. As the stock kept tumbling and more customers pulled their deposits from the bank, that deal fell apart, these people said. The share sale was cancelled Friday morning.

On Friday morning, the bank told employees to “work from home today and until further notice,” according to a copy of the email viewed by The Wall Street Journal.

SVB catered mainly to start-ups and the investors that fund them, an insular ecosystem that has taken a big hit since the Fed began raising rates last year to curb inflation. Start-ups, as a result, drained their deposits with SVB faster than the bank expected. And new investment had stalled, meaning fresh money wasn’t coming into the bank.

Rising interest rates, meanwhile, dented the value of SVB’s bondholdings. The bank late Wednesday disclosed it had sold a big chunk of those holdings at a loss. Investors dumped the stock, spooking customers and sparking a bank run.

Chief Executive Greg Becker held a call with jittery customers Thursday, telling them the bank was on solid financial footing despite the loss. But concerned SVB clients were already calling rival banks looking to move large balances in excess of FDIC insurance caps.

Some venture-capital investors advised start-ups to pull their money out of the bank to avoid losses should the bank fail, The Wall Street Journal previously reported.

Alison Greenberg, co-founder of Los Angeles-based maternity care start-up Ruth Health, was in a meeting Thursday when she got a frantic email from a seed investor.

“It basically just said ‘Things are imploding at SVB, it’s urgent that you get your money out,’” Ms Greenberg said.

The meeting came to an abrupt halt. Ms Greenberg called the investor, who answered the phone out of breath, she said.

The investor told her she should get as much money out of the bank as she possibly could, Ms Greenberg said.

Audrey Wu, a Ruth Health co-founder, began making transfers out of the company’s account of different denominations, hoping not to trip up any automated systems that would flag the transactions and potentially delay them.

As she prepared to carry out the final transfer from the account, SVB’s website crashed and she couldn’t log back in, she said. The company still has some money in the account.

Others stuck with SVB. Financial-technology investor Restive Ventures said in an email early Friday morning that it was keeping its money at the bank and encouraging portfolio companies to do the same. It urged people to calm down. “Moving corporate treasury under time pressure, on the internet, is a recipe for disaster,” the email said.

SVB’s deposits boomed alongside the tech industry, rising 86 per cent in 2021 to $189 billion and peaking at $198 billion a quarter later. The bank poured large amounts of the deposits into U.S. Treasurys and other government-sponsored debt securities. Soon after, the Fed began raising rates.

Rising rates and the tech downturn caused deposits to decline, spurring the bank to sell substantially all of its available-for-sale securities.

The Wall St Journal