Silicon Valley Bank seized by US FDIC as depositors pull cash

The US Federal Deposit Insurance Corporation (FDIC) seized the assets of Silicon Valley Bank on Friday, in what was the bank’s biggest bankruptcy since Washington Mutual at the height of the 2008 financial crisis.

The bank collapsed after depositors, mostly tech and venture capital firms, began withdrawing their money, leading to a flight from the bank.

Silicon Valley Bank has been heavily influenced by the tech industry and has little chance of contagion in the banking sector, as it did in the months leading up to the Great Recession more than 15 years ago. Large banks have enough capital to avoid this situation.

The FDIC ordered the closure of Silicon Valley Bank and immediately took possession of all of its deposits on Friday. The FDIC said in a statement that at the time of the bankruptcy, the bank had $209 billion in assets and $175.4 billion in deposits. It was not clear how many deposits exceeded the $250,000 insurance limit.

Notably, the FDIC has not announced a buyer of the Silicon Valley assets, which usually happens when a bank closes on schedule. The FDIC also seized the bank’s assets in the middle of the business day, a testament to how dire the situation has become.

Silicon Valley Bank’s financial health has become increasingly precarious this week after the bank announced plans to raise up to $1.75 billion to bolster its capital position amid concerns about higher interest rates and the economy. Shares of SVB Financial Group, the parent company of Silicon Valley Bank, fell nearly 70 percent before trading was halted ahead of the opening of trading on the Nasdaq.

CNBC reported that attempts to raise capital have failed and the bank is now trying to sell itself.

bruise week

As the 16th largest bank in the country, the Silicon Valley bank is not small. It acts as the main financial conduit for venture capital (VC) backed companies, which have been hit hard over the past 18 months as the Federal Reserve raised interest rates and made riskier tech assets less attractive to investors.

VC-backed companies have reportedly been advised to withdraw at least two months’ worth of “burnt” funds from the Silicon Valley bank to cover their costs. Typically, venture capital-backed companies don’t turn a profit, and how quickly they use the money they need to run their business – their so-called “burnout rate” – is usually an important metric for investors.

Shares of diversified banks such as Bank of America and JPMorgan bounced back from early declines due to data released Friday by the Labor Department that showed a slowdown in wage growth in February. But regional banks, especially those with strong ties to the tech industry, have been in decline.

Regardless, it’s been a tough week.

The S&P 500 Regional Banks Index fell 4.3 percent, bringing its losses this week to 18 percent, its worst week since 2009. 11.5 percent.

The problems at SVB highlight how the US Federal Reserve and other central banks’ campaign to fight inflation by ending the era of cheap money exposes vulnerabilities in the market.

Over the past year, global borrowing costs have risen at the fastest rate in decades, as the Federal Reserve raised US rates by 450 basis points from near zero and the European Central Bank raised eurozone rates by 300 basis points.

‘Chaos’

As higher interest rates shut down the IPO market for many startups and made private fundraising more expensive, some SVB clients have begun withdrawing money.

To finance the repayment, SVB sold a $21 billion bond portfolio on Wednesday, made up primarily of U.S. Treasuries. SVB announced on Thursday that it will sell $2.25 billion of common stock and preferred convertible shares to fill a funding hole.

A British venture capital executive who asked not to be named because he is not allowed to speak to the press told Reuters news agency that his firm rushed to withdraw “single-digit millions” from four Silicon Valley Bank accounts late last night. on Thursday.

The source described the situation as “chaos”.

The tech sector has been hit hard and stress has been built up in other market sectors as rates have risen.

Sources familiar with the situation told Reuters that on Thursday, some startups advised their founders to withdraw money from SVB as a precautionary measure.

SVB short sellers have made a profit of $717 million since the close of trading on Wednesday, according to analyst firm Ortex.

“The market is tired of companies doing business with loss-making companies or losing money themselves,” said David Trainer, CEO of investment research firm New Constructs.

Treasury Secretary Janet Yellen told lawmakers on Capitol Hill on Friday that the ministry is aware of the latest developments and is monitoring the situation, calling it “a cause for concern” when banks suffer losses, CNBC reported.

US regulators arrived at the bank’s California offices on Friday, Bloomberg News reported.