Silicon Valley Bank collapse: How the financial institution fell into ruin – National
Last week’s failure of Silicon Valley Bank (SVB) amid record inflation and lending rates has led to concerns that other banks could face a similar fate.
But what caused SVB to go bankrupt last week? Here’s what we know.
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Bank of Canada is not alone. The US Federal Reserve has raised interest rates from record lows since last year to fight inflation.
As interest rates increased and available funds became more expensive, investors lost their appetite for risk and weighed on SVB’s main clients, tech start-ups.
Additionally, tech companies have been hit hard over the past 18 months as the Federal Reserve hiked interest rates.
Rising interest rates have closed the market for initial public offerings for many startups, making private funding more costly.
As a result, some SVB customers have started to withdraw funds to meet their liquidity needs, and as a result, SVB last week looked for ways to meet customer withdrawals.
Which brings us to the events of last Wednesday, March 8th.
March 8: SVB sells bonds
SVB held a US$21 billion fixed income portfolio consisting primarily of US Treasuries, but rising interest rates have reduced the value of its sovereign debt holdings.
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SVB sold its portfolio on Wednesday to raise funds for the client’s redemption.
The average yield is 1.79%, well below the current 10-year Treasury yield of about 3.9%. As a result, SVB suffered his US$1.8 billion loss, which had to be covered by a capital increase.
March 9: Sell stocks next
On Thursday, SVB announced it would sell $2.25 billion in shares to fill a funding shortfall.
But its share price ended the trading day down 60% as investors feared deposit withdrawals could prompt it to raise more capital.
Reuters reported that some SVB clients had withdrawn money from banks on the advice of venture capital firms such as Peter Thiel’s Future Fund and others such as General Atlantic, which SVB was preparing to sell its stake. Surprise investors.
The fundraising effort collapsed late Thursday.
March 10: Silicon Valley Bank Receives Incentives
SVB rushed to find alternative funding on Friday, including a sale of the company.
Later that day, the Federal Deposit Insurance Corporation (FDIC) announced that the SVB had been closed and placed under its control. The unusual move in the middle of the working day showed how dire the situation had become.
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The FDIC is looking to sell SVB’s assets, adding that future dividend payments could go to uninsured depositors.
But uncertainty quickly spurred concerns about what would happen to deposits above the $250,000 insurance threshold, with many tech companies that used banks to pay salaries on Monday morning. This led to the concern that it might become impossible to do so.
March 12: No relief, but depositors are protected
US Treasury Secretary Janet Yellen told CBS on Sunday morning: face the nation Federal bailouts for failed banks are not underway, but officials said they were working on a plan to save depositors and restore confidence in the banking system.
Prominent Silicon Valley personalities and executives have pushed the giant red “panic” button, saying that more bank crackdowns are likely if Washington does not come to the rescue of Silicon Valley bank depositors.
Bill Ackman, a prominent Wall Street investor, tweeted, “The government has been given about 48 hours to rectify its soon-to-be irreversible mistake. , but says it invests in companies that do.
Some other Silicon Valley personalities go even further.
“100,000 Americans will line up at a local bank on Monday demanding gold. Most will not get it,” Jason Karakanis wrote on Twitter. Technology investor Karakanis is close to Elon Musk, who recently hijacked a social media network.
After a dramatic weekend, US regulators announced plans on Sunday.
SVB customers will be able to access all their deposits from Monday, and the regulator has set up new facilities to give banks access to emergency funds. The US Federal Reserve also made it easier for banks to borrow in times of emergency.
Regulators also moved quickly to close New York City’s Signature Bank, which had recently come under pressure.Signature is a commercial bank with private client offices in New York, Connecticut, California, Nevada and North It had nine domestic business divisions, including real estate and digital asset banking.
Silvergate Capital also said last week that it would voluntarily close its bank. It has been servicing the cryptocurrency industry and warned that it could result in “not having enough capital.”
Meanwhile, in Canada, the country’s banking regulator temporarily seized the assets of SVB’s only Canadian branch in Toronto on Sunday evening, protecting the rights and interests of the branch’s creditors.
In a statement issued on Sunday, the Office of the Superintendent of Financial Institutions (OSFI) said SVB’s Toronto branch primarily lends to corporate customers and the branch does not hold commercial or personal deposits in Canada. rice field.
Detective Superintendent Peter Routledge also announced his intention to take permanent control of the Canadian branch’s assets and has requested that the Attorney General of Canada apply for a liquidation order.
OSFI said it has been closely monitoring SVB’s Canadian branch since the bank’s troubles began. In line with the globally accepted international Basel III standards, “we will continue to exercise diligent supervision of Canadian federally regulated banks, including strict requirements for adequacy of capital and liquidity. I have,” he added.
However, the market has plunged since its opening, and fears of bank failures and contagion remain. Questions for Monday and the rest of the week are as follows: What happens next?
— Using files from Reuters and Associated Press
