The top bank for US tech startups quickly dissolved this week, leaving its powerful clients and investors in the lurch.
A Silicon Valley bank facing a sudden run and capital crisis collapsed Friday morning and was taken over by federal regulators.
It was the largest bankruptcy of an American bank after Washington Mutual in 2008.
Here’s what we know about the bank’s collapse and what might happen next.
What is SVB?
Founded in 1983, SVB specializes in banking for technology startups. It has provided funding for nearly half of US technology and healthcare venture capital firms.
While relatively unknown outside of Silicon Valley, SVB was among the top 20 U.S. commercial banks with total assets of $209 billion at the end of last year, according to the FDIC.
Why didn’t it work?
In short, SVB faced a classic run to the bank.
The longer version is a bit more complicated.
Several forces collided to bring down the banker.
First, there was the Federal Reserve, which began raising interest rates a year ago to curb inflation. The Fed acted aggressively, and higher borrowing costs undermined the momentum in tech stocks, which benefited SVB.
Higher interest rates also reduced the value of long-term bonds that SVB and other banks gobbled up in an era of ultra-low, near-zero interest rates. SVB’s bond portfolio totaled $21 billion giving an average of 1.79% – the current yield on 10-year Treasury bonds is about 3.9%.
At the same time, venture capital began to dry up, forcing start-ups to use the funds held by SVB. So the bank was sitting on a mountain of unrealized bond losses just as the pace of customer withdrawals was picking up.
Panic takes root…
On Wednesday, SVB announced that it had sold a bunch of securities at a loss and would also sell $2.25 billion in new shares to shore up its balance sheet. This caused panic among key venture capital firms which reportedly advised the company withdraw your money from the bank.
The bank’s shares began to fall sharply on Thursday morning, followed by the shares of other banks in the afternoon, as investors began to fear a repeat of the financial crisis of 2007-2008.
By Friday morning, trading in SVB’s shares had been halted, and the company had abandoned efforts to quickly raise capital or find a buyer. California regulators stepped in, closing the bank and placing it under the control of the Federal Deposit Insurance Corporation.
Fears of infection subside
Despite initial panic on Wall Street, analysts said SVB’s collapse was unlikely to cause the domino effect that engulfed the banking industry during the financial crisis.
“The system is as well capitalized and liquid as it has ever been,” said Moody’s chief economist Mark Zandi. “The banks that are now in trouble are too small to be a significant threat to the wider system.”
All insured depositors will have full access to their insured deposits by Monday morning at the latest, the FDIC said. It will pay uninsured depositors an “advance dividend within the next week.”
What’s next?
So while wider contagion is unlikely, smaller banks that are disproportionately tied to industries like tech and crypto could be in for a rough ride, according to Ed Moya, senior market analyst at Oanda.
“Everybody on Wall Street knew the Fed’s rate hike campaign was going to break something eventually, and now it’s breaking the small banks,” Moya said Friday.
Typically, the FDIC sells a failed bank’s assets to other banks, using the proceeds to pay depositors whose funds were not insured.
A buyer for SVB could still emerge, though it is far from guaranteed.
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