Silicon Valley Bank shut down by regulators, FDIC takes control

Insured savers will be able to access their money by Monday morning, the FDIC said. Depositors with funds that exceed the insurance ceilings will receive trusteeship certificates for their uninsured assets, meaning companies with large deposits tied up with the bank are unlikely to get their money any time soon.

The bank is the 16th largest bank in the US, with approximately $209 billion in assets as of December 31, according to the Federal Reserve. It is by far the largest bank to fail since the near collapse of the financial system in 2008, second only to the collapse of Washington Mutual Inc.

The bank’s parent company, SVB Financial Group, was looking for a buyer after it scrapped a planned $2.25 billion share sale Friday morning. Regulators were not willing to wait. The California Department of Financial Protection and Innovation closed the bank within hours Friday and placed it under the control of the FDIC.

Customers attempted to withdraw $42 billion on Thursday alone, about a quarter of the bank’s total deposits, the California regulator said in a filing Friday. The deluge of withdrawals destroyed the bank’s finances; at the end of Thursday, it had a negative cash balance of nearly $1 billion and was unable to cover its outgoing payments to the Fed, according to the filing.

The bank was in sound financial condition on Wednesday, the regulator said. A day later it was bankrupt.

The SVB’s problems have dragged much of the industry down. Investors dumped the stocks of big and small banks on Thursday, stripping $52 billion from the value of the four largest U.S. banks alone. The mega banks rallied on Friday, but many of their smaller counterparts continued to fall. Several were halted due to volatility.

Investors are concerned about banks with a profile similar to the SVB. Shares of San Francisco-based First Republic Bank,

which focuses on businesses and high net worth individuals is down about 30% since Wednesday. “First Republic’s deposit base is strong,” the bank said Friday.

Shares of PacWest Bancorp are down 54% in the past two days. More than two-thirds of the loan portfolio is tied to real estate, a significant portion of which is lent to venture capital firms.

SVB mainly focused on the insular ecosystem of startups and the investors who finance them. Deposits grew alongside the technology industry, rising 86% in 2021 to $189 billion and peaking at $198 billion a quarter later. The bank diverted large amounts of deposits into US Treasury bonds and other government-sponsored debt securities.

Tech collapsed after the Federal Reserve began raising interest rates last year to curb inflation. As a result, startups emptied their deposits with SVB faster than the bank had expected. And new investments stopped, which meant no fresh money in the bank.

Rising interest rates, meanwhile, depressed the value of SVB’s huge bond portfolio. The bank needed fresh capital.

SVB hired Goldman Sachs Group Inc.

earlier this week to conduct a private share sale, with plans to announce it upon completion to avoid spooking investors, according to a person familiar with the offering.

Subsequently, Moody’s Investor Service informed the SVB that it intended to downgrade the bank’s credit rating, the person said. In practice, Moody’s notifies issuers 24 hours in advance of a change in credit rating.

Bankers and SVB executives feared a downgrade would hurt the company more than a share sale, said the person close to the deal. They rushed to bring in private equity firm General Atlantic to anchor the deal with a $500 million commitment and announced the planned sale after the market closed on Wednesday. Moody’s cut the company later that night.

SVB shares fell sharply after the stock market opened on Thursday. The violent movement in the stock alarmed customers, who began withdrawing their money from the bank to avoid being left with losses in the event of a failure.

Chief Executive Greg Becker tried to reassure customers over the phone Thursday by telling them that the bank was on solid financial footing despite the losses. It did not work. Venture capital investors advised startups to take their money out of the bank to avoid losses on deposits in excess of FDIC’s $250,000 insurance cap. The bank had more than $151 billion in deposits in excess of the FDIC limit at the end of 2022.

Rival banks were inundated with calls from potential customers wanting to move their balances.

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

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

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

While preparing to make the final account transfer, the SVB’s website crashed and she was unable to log in, she said.

Shares of SVB fell more than 60% to $106.04 on Thursday.

Goldman bankers arranged for SVB to sell shares Thursday afternoon for $95 each, according to people familiar with the offer. As the stock continued to fall and more customers took their deposits from the bank, that deal fell apart, these people said.

Some supporters tried to support the bench. Financial technology investor Restive Ventures said in an email early Friday morning that it kept its money with SVB and encouraged portfolio companies to do the same. “Moving corporate treasuries over the Internet under time pressure is a recipe for disaster,” the email read.

The share sale was canceled a few hours later. 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.

By 9 a.m. on the West Coast, regulators had seized the bank.

More than two dozen people, some identifying themselves as customers, showed up at the bank’s headquarters in Santa Clara on Friday morning. A press release from the FDIC announcing the bank’s closure was taped to a closed door.

“We’re in trouble right now,” one customer said over the phone. “We shouldn’t have had all our eggs in one basket,” he added.

Jack Singh, advisor at Avahi Inc., a startup consulting partner for Amazon Web Services, Amazon.com from Inc

cloud computing arm, said the company had begun sending wire transfers from SVB to an account at JPMorgan Chase & Co on Thursday. As of Friday morning, some of those transfers had fallen through. He showed up at the bank’s headquarters to see if he could even withdraw $40,000 or $50,000.

Mr. Singh said he has to pay wages. “There are individuals who depend on the money in the bank,” he said, adding, “It’s Friday and everything is just paused. So we’re definitely going to get calls from employees.”

His 6-year-old son overheard a conversation he had with an accountant about the situation, Mr. Singh. The boy took out his wallet and tried to give his father a few dollars.

—Ben Foldy and Dana Cimilluca contributed to this article.

Write to Rachel Louise Ensign at Rachel.Ensign@wsj.com, Corrie Driebusch at corrie.driebusch@dowjones.com, and Meghan Bobrowsky at meghan.bobrowsky@wsj.com