Regulators took over California-based Silicon Valley Bank on Friday in the second-biggest bank failure in US history.
The Santa Clara-headquartered bank was shuttered by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as the receiver.
This is the biggest bank collapse in the US since the 2008 failure of Washington Mutual during the height of the global financial crisis.
Silicon Valley Bank failed after depositors — mostly technology workers and venture capital-backed companies — began withdrawing their money, creating a run on the bank.
Shares of the bank were halted on Friday before the opening bell of the Nasdaq after they tumbled 66 per cent in premarket trading. The FDIC did not announce a buyer of the bank’s assets, which is usually done when there’s an orderly wind-down of a financial institution.
The seizure of Silicon Valley’s assets in the middle of the business day rather than at the close of business is perhaps a sign of how dire the situation had become. Questions were raised this week after the bank announced plans to raise up to $1.75bn in order to strengthen its capital position amid concerns about higher interest rates and the economy.
Silicon Valley Bank was the 16th largest in the US — and had approximately $209bn in total assets and about $175.4bn in total deposits, as of 31 December 2022. Washington Mutual has total assets of $307bn when it was shuttered on 25 September 2008, 10 days after Lehman Brothers failed.
What led to the collapse of Silicon Valley Bank?
Founded in 1983, Silicon Valley Bank was the 18th largest bank by assets in the US prior to its collapse, with 17 branches in California and Massachusetts.
Headquartered in Santa Clara, California, it primarily catered to startups in the technology and healthcare sectors.
Ultimately, the failure of SVB can be traced back to the Federal Reserve’s battle against inflation through aggressive interest rate hikes, which have battered the tech sector over the past year.
In 2021, when interest rates were near zero and easy money flooded the economy, venture capital investments in startups surged to a record high of $671 billion in the US, according to KPMG.
That also meant booming business for SVB, as the bank’s startup clients increased their deposits with the bank, which roughly doubled in 2021.
The bank then used those deposits to grow its loan portfolio, the basic business model banks use to generate a profit, though its interest-generating loans did not grow as quickly as its soaring deposits.
For safekeeping, SVB invested much of the extra cash from customer deposits into US Treasuries and other government bonds, which is a standard practice at banks.
The situation began to change after the Fed began its rate hikes one year ago.
As interest rates rose, VC investments began to dwindle, and SVB’s startup clients drew down their accounts at the bank faster than expected to cover expenses.
At the same time, rising interest rates also decreased the market value of the Treasury securities in which SVB had invested deposited funds.
On Wednesday, SVB revealed that in the face of a cash burn from dwindling deposits, it was forced to sell off its bond holdings at a $1.8 billion loss. The bank announced plans to seek $2 billion from investors to cover the shortfall.
The announcement triggered a panic in Silicon Valley, and on Thursday some prominent venture capitalists, including Peter Theil, began urging their portfolio companies to withdraw any deposits from SVB.
What followed appears to be a classic bank run: a rush of customer withdrawals that tips a bank into failure when it is unable to meet the demand for immediate cash.
SVB scrambled on Friday to find alternative funding, including through a sale of the company. Later in the day, however, the Federal Deposit Insurance Corporation (FDIC) then announced that SVB was shut down and placed under its receivership.
Will SVB’s customers get their money back?
Following the shutdown, the FDIC said SVB depositors will have full access to their insured deposits no later than Monday morning.
The federal agency insures each depositor up to at least $250,000.
For customers that have deposits larger than $250,000, which likely includes many of the bank’s startup company customers, what happens next is less clear.
Depositors with funds above the insured amount will receive a dividend within the next week, and a receivership certificate for the remaining amount of their uninsured funds.
As the FDIC sells off the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.
The FDIC said that at the time of the shutdown, the amount of uninsured deposits at the bank was undetermined.
In theory, it is possible that uninsured deposits could eventually be repaid in full, because the bank’s total assets are larger than the amount it owes depositors.
At the time of failure, SVB had $209 billion in total assets and owed depositors about $175.4 billion, according to the FDIC.
However, some of those assets could be difficult to liquidate, such as ownership stakes in companies that are not publicly traded, or loans to early-stage startups.
Ultimately, only time will tell how much of the uninsured deposits are returned to customers.
CEO sold $3.57 million just two weeks before collapse
The CEO of Silicon Valley Bank sold $3.57m of stock in a pre-planned, automated sell-off two weeks before it collapsed – and the CFO ditched $575,000 the same day.
Greg Becker sold 12,451 shares at an average price of $287.42 each on February 27. The price plunged to just $39.49 in premarket Friday before the Federal Deposit Insurance Corporation (FDIC) seized the bank’s assets.
The day his sale went through, Becker bought the same number of shares using stock options priced at $105.18 each, according to filings with the Securities and Exchange Commission. The options, which allow you to buy a company’s stock at a set price, were due to expire May 2. The transactions were made through a trust that he controls, using a trading plan that he had set up on January 26, records show.
SVB’s CFO Daniel Beck sold 2,000 shares at $287.59 per share on the same day as his boss. He set up his trading plan on January 24.
What happens next at Silicon Valley Bank?
To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB).
When the bank was shuttered Friday, the FDIC immediately transferred all insured deposits of Silicon Valley Bank to the DINB.
Starting on Monday, the main office and all branches of Silicon Valley Bank will reopen under the control of the DINB.
‘Banking activities will resume no later than Monday, March 13, including on-line banking and other services. Silicon Valley Bank’s official checks will continue to clear,’ the FDIC said in a statement.
Customers with accounts in excess of the insured amount of $250,000 should contact the FDIC toll-free at 1-866-799-0959.
