New York (CNN) Silicon Valley Bank collapsed on Friday morning after a stunning 48 hours in which a bank run and capital crisis led to the second-largest failure of a financial institution in US history.
California regulators shut down the technology lender and placed it under the control of the U.S. Federal Deposit Insurance Corporation. The FDIC acts as a receiver, which usually means it will liquidate the bank’s assets to pay off its customers, including depositors and creditors.
The FDIC, an independent government agency that insures bank deposits and oversees financial institutions, said all insured depositors would have full access to their insured deposits no later than Monday morning. The company said it would pay unsecured depositors an “advance dividend next week”.
The bank, formerly owned by SVB Financial Group, did not respond to CNN’s request for comment.
What happened?
The wheels started coming off on Wednesday when SVB announced that it had sold a bunch of securities at a loss and that it would sell $2.25 billion in new shares to shore up its balance sheet. This caused panic among key venture capital firms, who reportedly advised companies to withdraw their money from the bank.
The company’s stock cratered on Thursday, dragging other banks down with it. By Friday morning, SVB’s shares were suspended and the company abandoned its attempts to quickly raise capital or find a buyer. Several other bank stocks were suspended Friday, including First Republic, PacWest Bancorp and Signature Bank.
The FDIC’s mid-morning takeover was notable because the agency typically waits until the market closes to intervene.
“SVB’s condition deteriorated so quickly that it could not last just five more hours,” Better Markets CEO Dennis M. Kelleher wrote. “This is because its depositors were withdrawing their money so quickly that the bank was insolvent and an intraday shutdown was inevitable due to a classic run on the bank.”
Silicon Valley Bank’s decline stems in part from the Federal Reserve’s aggressive rate hikes over the past year.
When interest rates were near zero, banks loaded up on long-term, seemingly low-risk Treasuries. But as the Fed has raised interest rates to fight inflation, the value of those assets has fallen, leaving banks sitting on unrealized losses.
Higher interest rates are hitting technology particularly hard, undercutting the value of tech stocks and making it harder to raise funds, Moody’s chief economist Mark Zandi said. This prompted many technology firms to withdraw the deposits they held in SVB to finance their operations.
“Higher interest rates also reduced the value of their Treasuries and other securities that SVB had to pay depositors,” Zandi said. “All of this caused a flight from their deposits, which forced the FDIC to swallow SVB.”
The Deputy Minister of Finance, Wally Adeyemo, on Friday sought 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 are very confident in the ability and resilience of the system,” Adeyemo told CNN in an exclusive interview.
The comments come after Treasury Secretary Janet Yellen called an unscheduled meeting of financial regulators to discuss the implosion of Silicon Valley Bank, a major lender to the beleaguered technology sector.
“We have the tools that are needed to [deal with] incidents like what happened with Silicon Valley Bank,” Adeyemo said.
Adeyemo said US officials were “learning more information” about the collapse of Silicon Valley Bank. He argued that the Dodd-Frank financial reform reform signed into law in 2010 gave regulators the tools they needed to address this and improved bank capitalization.
Adeyemo declined to predict what, if any, impact it would have on the broader economy or the tech industry.
2008 Echo
Despite Wall Street’s initial panic over SVB’s run, which sent its shares cratering, analysts said the bank’s collapse was unlikely to trigger the domino effect that engulfed the banking industry during the financial crisis.
“The system is as well capitalized and liquid as it’s ever been,” Zandi said. “The banks now in trouble are too small to pose a significant threat to the wider system.
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But smaller banks, which are disproportionately tied to cash-strapped industries like technology and cryptocurrencies, could find themselves struggling, according to Ed Moya, senior market analyst at Oanda.
“Everybody on Wall Street knew that the Fed’s campaign to raise interest rates would eventually break something, and right now it’s bringing down small banks,” Moya said.
“Idiosyncratic Situation”
Although relatively unknown outside Silicon Valley, SVB was among the 20 largest 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 fail since the bankruptcy of Washington Mutual in 2008.
The bank has partnered with nearly half of all technology and healthcare companies in the United States, many of which have withdrawn deposits from the bank.
Mike Mayo, Wells Fargo’s senior banking analyst, said the SVB crisis may be an “idiosyncratic situation.”
“It’s night and day against the global financial crisis of 15 years ago,” he told CNN’s Julia Chatterley on Friday. Back then, he said, “banks were taking excessive risks and people thought everything was fine. Now everyone is concerned, but underneath the surface banks are more resilient than they have been in a generation.”
Rising interest rates bite
SVB’s sudden drop reflects other risky bets that have been exposed in the market turmoil of the past year.
Crypto-focused lender Silvergate said on Wednesday it was winding down and liquidating the bank after it was hit financially by turmoil in digital assets. Signature Bank, another lender, was hit hard by the bank selloff, with shares plunging 30% before being halted on volatility on Friday.
“The institutional challenges facing SVB reflect a larger and more widespread systemic problem: the banking industry is sitting on a ton of low-yielding assets that, thanks to the last year of rate hikes, are now far below water — and sinking,” wrote Konrad Alt, co-founder of Klaros Group.
Alt estimated that rate hikes have “effectively wiped out approximately 28% of all capital in the banking industry by the end of 2022.”