NEW YORK (AP) — U.S. regulators rushed to seize the assets of Silicon Valley Bank on Friday after a run on the bank, marking the biggest failure of a financial institution since Washington Mutual collapsed at the height of the financial crisis more than a decade ago.
Silicon Valley Bank, the nation’s 16th-largest bank, collapsed after its depositors – mostly tech workers and venture capitalist-backed companies – rushed to withdraw cash this week as concern about the health of the bank was spreading. It is the second largest bank failure in US history.
The bank had strong ties to Silicon Valley industries and startups. Y Combinator, an incubator startup that launched businesses such as Airbnb, DoorDash and Dropbox, has referred hundreds of entrepreneurs to the bank.
“This is an extinction-level event for startups,” said Y Combinator CEO Garry Tan. “I’ve literally heard hundreds of our founders asking for help on how they can get through this. They’re asking, ‘Should I lay off my workers?’ »
Tan estimated that nearly a third of Y Combinator startups won’t be able to make payroll at some point in the next month if they can’t access their money. He said he was asking regulators and lawmakers whether startups could be eligible for financial aid.
Silicon Valley was heavily exposed to the tech industry but chaos is unlikely to spill over into the broader banking sector like in the months leading up to the Great Recession more than a decade ago. The biggest banks – those most likely to cause widespread economic collapse – have healthy balance sheets and abundant capital.
In 2007, the biggest financial crisis since the Great Depression spread across the world after the collapse in the value of mortgage-backed securities tied to ill-advised home loans. Panic on Wall Street led to the demise of Lehman Brothers, a company founded in 1847. Because the big banks were widely exposed to each other, it led to a cascading collapse of the global financial system, putting millions of unemployed people.
There has been unease in the banking sector all week and news of Silicon Valley Bank’s distress sent shares of almost all financial institutions lower on Friday, stocks that had already fallen by double digits since Monday. .
Silicon Valley Bank’s failure happened with incredible speed, with some industry analysts suggesting on Friday that it was a good company and still likely a wise investment. Silicon Valley Bank executives were trying to raise capital early Friday and find additional investors. However, trading in the bank’s shares was halted before the stock market’s opening bell due to extreme volatility.
Shortly before noon Eastern Time, the Federal Deposit Insurance Corporation decided to close the bank. Notably, the FDIC did not wait for the close of business to seize the bank, as is usually the case during an orderly liquidation of a financial institution. The FDIC could not immediately find a buyer for the bank’s assets, signaling how quickly depositors cashed in.
The White House said Treasury Secretary Janet Yellen was “watching closely.” The White House has sought to reassure people that the banking system is much healthier than it was during the Great Recession.
“Our banking system is in a fundamentally different place than it was, you know, ten years ago,” said Cecilia Rouse, chair of the White House Council of Economic Advisers. “The reforms that were put in place at the time really provide the kind of resilience that we would like to see.”
Silicon Valley Bank had $209 billion in assets at the time of the failure, the FDIC said. It was unclear how many of its deposits exceeded the $250,000 insurance limit, but previous regulatory reports showed that a large portion of Silicon Valley Bank’s deposits exceeded that limit. The FDIC filing below the $250,000 limit would be available Monday morning.
The bank still looked stable this year, but on Thursday it announced plans to raise up to $1.75 billion to bolster its capital position. This sent investors rushing and shares plunged 60%. They fell again on Friday before the opening of the Nasdaq, where it is traded.
As its name suggests, Silicon Valley Bank was a major financial conduit between the technology sector, its founders and startups as well as its workers. It was considered a good business decision to develop a relationship with the bank if a founder wanted to find new investors or go public.
Conceived in 1983 by co-founders Bill Biggerstaff and Robert Medearis during a game of poker, the bank leveraged its Silicon Valley roots to become a financial cornerstone of the tech industry.
According to the bank’s website, nearly half of US tech and healthcare companies that went public last year after securing initial funding from venture capital firms were Silicon Valley clients.. The bank also boasts of its customers’ relationships with several well-known technology companies such as Shopify, ZipRecruiter and one of the leading venture capital firms, Andreesson Horowitz, founded by web browser pioneer Marc Andreessen.
Bill Tyler, CEO of TWG Supply in Grapevine, Texas, said he first realized something was wrong when his employees texted him at 6:30 a.m. Friday that they weren’t. had not received their paycheque. TWG, which has only 18 employees, had previously sent the money from its paychecks to a payroll service provider, Rippling PEO, which had used Silicon Valley Bank. He struggled to figure out how to pay his workers.
“We’re expecting around $27,000,” he said. “It’s already not a timely payment. It’s already an uncomfortable position. I don’t want to ask employees to say, “Hey, can you wait until the middle of next week to get paid?”
Rippling CEO Parker Conrad tweeted that the company will process payroll through JPMorgan Chase. But today’s payments from Silicon Valley Bank, he added, “have not been processed” and the FDIC’s involvement made him skeptical of the assurances he was receiving from the bank.
Silicon Valley Bank’s ties to the tech sector have compounded its problems. Tech stocks have been hit hard over the past 18 months after a growth spurt during the pandemic and layoffs have spread across the sector. Venture capital funding has also declined.
At the same time, the bank has been hit hard by the Federal Reserve’s fight against inflation and an aggressive series of interest rate hikes to cool the economy.
As the Fed raises its benchmark interest rate, the value of bonds, usually a stable asset, begins to decline. That’s usually not a problem, but when depositors get anxious and start withdrawing their money, banks sometimes have to sell those bonds before they mature to cover that exodus.
This is exactly what happened to Silicon Valley Bank, which had to sell $21 billion of highly liquid assets to cover the deposit outflow. It took a $1.8 billion loss on that sale.
Ashley Tyrner, CEO of FarmboxRx, said she spoke to several friends whose venture capital-backed businesses. She described these friends as being “out of their minds” over the bank’s failure. Tyrner’s chief operating officer attempted to withdraw the funds from his company on Thursday, but failed to do so in time.
“A friend said he couldn’t do payroll today and cried when he had to notify 200 employees because of this issue,” Tyrner said.
Associated Press writers Michael Liedtke, Cora Lewis and Matt O’Brien and Barbara Ortutay contributed to this story.