Silicon Valley Bank collapses after failing to raise capital

New York (CNN) Silicon Valley Bank collapsed Friday morning after a stunning 48 hours in which a bank run and capital crunch led to the second largest financial institution failure in US history.

California regulators shut down the technology provider and placed it under the control of the US Federal Deposit Insurance Corporation. The FDIC acts as a receiver, which usually means it will liquidate the bank’s assets to repay its customers, including depositors and creditors.

The FDIC, an independent government agency that insures bank deposits and oversees financial institutions, said all insured depositors will have full access to their insured deposits by Monday morning. It said it would pay uninsured savers an “advance dividend within the next week”.

The bank, formerly owned by SVB Financial Group, did not respond to CNN’s request for comment.

What happened?

The wheels began to come loose on Wednesday, when SBV announced it had sold some securities at a loss and would sell $2.25 billion in new shares to strengthen its balance sheet. That caused panic among the major venture capital firms, who reportedly advised companies to withdraw their money from the bank.

The company’s shares collapsed Thursday, dragging other banks with it. As of Friday morning, SBV’s shares had been halted and it had given up trying to quickly raise capital or find a buyer. Several other bank stocks were temporarily halted Friday, including First Republic, PacWest Bancorp and Signature Bank.

The timing of the mid-morning takeover by the FDIC was noteworthy, as the agency typically waits for the market to close to intervene.

“SVB’s condition deteriorated so quickly that it couldn’t last another five hours,” wrote Dennis M. Kelleher, CEO of Better Markets. “That’s because depositors were withdrawing their money so quickly that the bank was insolvent and an intraday close was inevitable due to a classic bank run.”

Silicon Valley Bank’s decline is partly due to the Federal Reserve’s aggressive rate hikes over the past year.

When interest rates approached zero, banks loaded up on long-dated, seemingly low-risk Treasuries. But as the Fed raises rates to fight inflation, the value of those assets has fallen, leaving banks with unrealized losses.

Higher interest rates hit technology particularly hard, undermining the value of technology stocks and making it difficult to raise funds, said Moody’s chief economist Mark Zandi. This prompted many technology companies to withdraw the deposits they held at SVB to finance their activities.

“Higher rates also lowered the value of their treasury and other securities that SVB needed to pay depositors,” said Zandi. “All of this caused a run on their deposits that forced the FDIC to take over SVB.”

Deputy Finance Minister Wally Adeyemo on Friday tried to reassure the public about the health of the banking system following the sudden collapse of SVB.

“Federal regulators are paying attention to this particular financial institution, and when we think about the broader financial system, we have great confidence in the ability and resilience of the system,” Adeyemo told CNN in an exclusive interview.

The comments come after Treasury Secretary Janet Yellen convened an unscheduled meeting of financial regulators to discuss the implosion of Silicon Valley Bank, a major lender to the stricken tech sector.

“We have the tools to do that [deal with] incidents like what happened with Silicon Valley Bank,” Adeyemo said.

Adeyemo said US officials are “learning more information” about the collapse of Silicon Valley Bank. He argued that the Dodd-Frank financial reform overhaul, signed into law in 2010, has given regulators the tools they need to address this and improved banks’ capitalization.

Adeyemo declined to predict what the impact, if any, would be on the wider economy or the technology industry.

Echoes of 2008

Despite initial panic on Wall Street over the run on SVB, which sent the stock crashing, analysts said the bank’s collapse is unlikely to trigger the kind of domino effect that gripped the banking industry during the financial crisis.

“The system is as well capitalized and liquid as it has ever been,” Zandi said. “The banks that are in trouble right now are far too small to pose a serious threat to the wider system.”

But according to Ed Moya, senior market analyst at Oanda, smaller banks that are disproportionately tied to cash-stricken sectors like technology and crypto could struggle.

“Everyone on Wall Street knew that the Fed’s rate hike campaign would eventually break something, and right now small banks are being toppled,” Moya said.

‘Quirky Situation’

While SVB is relatively unknown outside of Silicon Valley, it was among the top 20 U.S. commercial banks, with $209 billion in total assets, at the end of last year, according to the FDIC.

It is the largest lender to collapse since Washington Mutual collapsed in 2008.

The bank partnered with nearly half of all venture capital-backed technology and healthcare companies in the United States, many of which took deposits from the bank.

Mike Mayo, senior banking analyst at Wells Fargo, said the crisis at SVB could be “a peculiar situation.”

“This is night and day versus the global financial crisis of 15 years ago,” he told CNN’s Julia Chatterly on Friday. At the time, he said, “banks were taking excessive risks and people thought everything was fine. Now everyone is worried, but under the surface, the banks are more resilient than they have been in a generation.”

Tariff hikes are taking a bite

SVB’s sudden drop mirrored other high-risk bets exposed in last year’s market turmoil.

Crypto-focused lender Silvergate said Wednesday it is winding down operations and will liquidate the bank after it has been financially ravaged by digital asset turmoil. Signature Bank, another lender, was hit hard by the bank’s sell-off, with shares falling 30% before being halted Friday due to volatility.

“SVB’s institutional challenges reflect a larger and more widespread systemic problem: the banking sector is sitting on a heap of low-yield assets that, thanks to the past year of rate hikes, are now well under water – and sinking,” wrote Konrad Alt, co-founder of Klaros Group. .

Alt estimated that rate increases “wiped out about 28% of all capital in the banking sector by the end of 2022”.