New York (CNN) Silicon Valley Bank collapsed on Friday morning after a staggering 48 hours in which a bank run and capital crisis led to the second-largest failure by a financial institution in US history.
California regulators shut down the tech lender and placed it under the control of the US Federal Deposit Insurance Corporation. The FDIC acts as a receiver, which generally means that it will liquidate the bank’s assets to reimburse its customers, including depositors and creditors.
The FDIC, an independent government agency that insures bank deposits and oversees financial institutions, said all insured depositors will have full access to their insured deposits by Monday morning. He said he would pay uninsured depositors an “early dividend over the next week”.
The bank, formerly owned by SVB Financial Group, did not respond to CNN’s request for comment.
What happened?
The wheels started to come off on Wednesday, when SBV announced that it had sold a bunch of securities at a loss and would sell $2.25 billion in new shares to shore up its balance sheet. This sparked a panic among major venture capitalists, who reportedly advised companies to pull their money out of the bank.
The company’s shares tumbled on Thursday, dragging other banks down with them. As of Friday morning, SBV’s stock was halted and it had abandoned efforts to quickly raise capital or find a buyer. Several other bank stocks were temporarily halted on Friday, including First Republic, PacWest Bancorp and Signature Bank.
The timing of the mid-morning FDIC takeover was notable, as the agency typically waits until the market closes to intervene.
“SVB’s condition deteriorated so rapidly that he could not last five more hours,” wrote Dennis M. Kelleher, CEO of Better Markets. “It was because its depositors were withdrawing their money so quickly that the bank was insolvent, and an intraday shutdown was inevitable due to a classic bank run.”
Silicon Valley Bank’s decline stems in part from the Federal Reserve’s aggressive interest rate hikes over the past year.
When interest rates were close to zero, banks stocked up on long-term, seemingly low-risk Treasuries. But as the Fed raises interest rates to fight inflation, the value of these assets has fallen, leaving banks sitting on unrealized losses.
Rising rates have hit tech particularly hard, reducing the value of tech stocks and making it difficult to raise funds, said Moody’s chief economist Mark Zandi. This prompted many tech companies to dip into the deposits they held at SVB to fund their operations.
“Rising rates also depressed the value of their cash and other securities that SVB needed to pay depositors,” Zandi said. “All of this sparked the run on their deposits that forced the FDIC to take control of SVB.”
Deputy Treasury Secretary Wally Adeyemo on Friday tried to reassure the public about the health of the banking system after 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 capacity 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 top lender to the struggling tech sector.
“We have the tools to [deal with] incidents like what happened to Silicon Valley Bank,” Adeyemo said.
Adeyemo said US officials were “learning more information” about the Silicon Valley Bank collapse. He argued that the Dodd-Frank financial reform overhaul, enacted in 2010, gave regulators the tools they need to address this issue and improved banks’ capitalization.
Adeyemo declined to predict what impact, if any, there will be on the wider economy or the tech industry.
Echoes of 2008
Despite initial panic on Wall Street over the run on SVB, which cratered its shares, analysts said the bank’s collapse is unlikely to trigger the kind of domino effect that gripped the banking industry during the financial crisis.
“The system is as well capitalized and liquid as it has ever been,” Zandi said. “The banks that are currently in trouble are far too small to pose a significant threat to the whole system.”
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But smaller banks that are disproportionately tied to cash-strapped industries like technology and crypto could take a beating, according to Ed Moya, senior market analyst at Oanda.
“Everyone on Wall Street knew the Fed’s rate hike campaign would eventually break something, and right now it’s destroying smaller banks,” Moya said.
“Idiosyncratic situation”
Although relatively unknown outside of Silicon Valley, SVB was among the top 20 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 Washington Mutual collapsed in 2008.
The bank has partnered with nearly half of all venture capital-backed tech and healthcare companies in the United States, many of which have withdrawn deposits from the bank.
Wells Fargo senior banking analyst Mike Mayo said the crisis at SVB could be “an idiosyncratic situation”.
“It’s night and day compared to the global financial crisis of 15 years ago,” he told CNN’s Julia Chatterly on Friday. At the time, he says, “banks were taking excessive risks and people thought everything was fine. Now everyone is concerned, but below the surface banks are more resilient than they have been.” been for a generation”.
Rate hikes take a bite
SVB’s sudden drop reflected other risky bets that were exposed during last year’s market turmoil.
Crypto-specialty lender Silvergate said on Wednesday it was winding down operations and liquidating the bank after it was financially hit by the digital asset turmoil. Signature Bank, another lender, was hit hard by the bank’s sale, with its shares falling 30% before being halted for volatility on Friday.
“SVB’s institutional challenges reflect a larger and more widespread systemic problem: the banking sector is sitting on a ton of low-yielding assets that, thanks to the last year of rate hikes, are now far under water – and fall apart,” wrote Konrad Alt, co-founder of the Klaros Group.
Alt estimated that the rate hikes had “effectively wiped out about 28% of all banking sector capital by the end of 2022.”