The go-to bank for U.S. tech startups collapsed quickly this week, leaving powerful clients and investors at a standstill.
Faced with a sudden bank run and capital crisis, Silicon Valley Bank collapsed Friday morning and was taken over by federal regulators.
It was the largest US bank failure since Washington Mutual in 2008.
Here’s what we know about the bank’s downfall and what happens next.
What is SVB?
Founded in 1983, SVB specializes in banking for technology start-ups. Funded nearly half of US venture-backed technology and healthcare companies.
Little known outside of Silicon Valley, SVB is among the top 20 commercial banks in America, according to the FDIC.
why did it fail?
In short, SVB has encountered a classic bank takedown.
The long version is a little more complicated.
Several forces collided to topple the bunker.
First, the Federal Reserve started raising interest rates a year ago to keep inflation in check. The Fed moved aggressively, and the tech stocks that had benefited the SVB lost momentum as borrowing costs rose.
Rising interest rates also devalued long-term bonds that SVB and other banks devoured in an era of ultra-low, near-zero interest rates. SVB’s US$21 billion bond portfolio has an average yield of 1.79%, and the current 10-year Treasury yield is around 3.9%.
At the same time, venture capital began to dry up, forcing startups to withdraw funds held by SVB. So banks were sitting on top of a pile of unrealized losses on bonds just as the pace of customer withdrawals was escalating.
Panic takes root…
On Wednesday, SVB said it would sell loss-making securities and sell $2.25 billion of new shares to strengthen its balance sheet. This prompted a panic among major venture capital firms, who reportedly advised them to withdraw funds from banks.
Bank stocks began to plunge Thursday morning, dragging other bank stocks down by afternoon as investors began to fear a repeat of the 2007-08 financial crisis.
By Friday morning, trading in SVB shares was halted, abandoning efforts to raise funds quickly or find a buyer. California regulators stepped in, closing the bank and placing it under the control of the Federal Deposit Insurance Corporation.
Fear of contagion subsides
Despite Wall Street’s initial panic, analysts say the SVB’s collapse is unlikely to trigger a domino effect like the one that hit the banking industry during the financial crisis.
“The system is better capitalized and liquid than ever before,” said Mark Zandy, chief economist at Moody’s. It doesn’t pose a threat.”
By Monday morning, all insured depositors will have full access to their insured deposits, according to the FDIC. Uninsured depositors will be paid “advance dividends within the next week.”
what’s next?
Ed Moya, senior market analyst at Oanda, says a wider contagion is unlikely, but smaller banks disproportionately tied to underfunded industries such as technology and cryptocurrencies are in trouble. It is said that there is a possibility that it will be erected.
“Everybody on Wall Street knew that the Fed’s rate hike campaign was finally going to break something. And now it’s bringing down small banks.
The FDIC typically sells the failed bank’s assets to other banks and uses the proceeds to repay depositors whose funds are not guaranteed.
SVB buyers may emerge, but they are far from guaranteed.
