Silicon Valley Bank fails after execution on deposits

One of the world’s biggest lenders to tech start-ups, grappling with unfortunate decisions and panicked customers, collapsed on Friday, forcing the federal government to step in.

The Federal Deposit Insurance Corporation announced Friday that it will take over Silicon Valley Bank, a 40-year-old institution based in Santa Clara, California. The bank’s failure is the second largest in US history and the largest since the financial crisis. of 2008.

The move brought nearly $175 billion in customer deposits under the regulator’s control. While the rapid fall of the country’s 16th largest bank evoked memories of the global financial panic of a decade and a half ago, it did not immediately spark fears of widespread destruction of the financial sector or of the world economy.

Silicon Valley Bank’s failure came two days after its emergency measures to handle withdrawal requests and a precipitous drop in the value of its investment holdings shocked Wall Street and depositors, tipping its stock. The bank, which had $209 billion in assets at the end of 2022, had been working with financial advisers until Friday morning to find a buyer, a person familiar with the negotiations said.

While the woes facing Silicon Valley Bank are unique to it, financial contagion has appeared to be spreading through parts of the banking sector, prompting Treasury Secretary Janet Yellen to publicly reassure investors about the resilience of the banking system.

Investors dumped shares of Silicon Valley Bank peers including First Republic, Signature Bank and Western Alliance, many of which cater to start-up clients and have similar investment portfolios.

Trading in shares of at least five banks was halted several times throughout the day as their steep declines triggered market volatility limits.

By comparison, some of the nation’s largest banks seemed more immune to the fallout. After falling on Thursday, shares of JPMorgan, Wells Fargo and Citigroup were all broadly flat on Friday.

This is because the biggest banks operate in a very different world. Their capital requirements are stricter and they also have much larger deposit bases than banks like Silicon Valley, which do not attract masses of retail customers. Regulators have also tried to prevent big banks from focusing too much on one area of ​​business, and they have largely steered clear of riskier assets like cryptocurrencies.

“I don’t think that’s a problem for the big banks — that’s the good news, they’re diversified,” said former FDIC chairwoman Sheila Bair. Ms Bair added that since the biggest banks were required to hold cash. equivalents against even the safest forms of government debt, they should be expected to have ample liquidity.

On Friday, Ms. Yellen discussed issues surrounding Silicon Valley Bank with banking regulators, according to a statement from the Treasury Department.

Representatives from the Federal Reserve and FDIC also held a bipartisan briefing for members of Congress hosted by Maxine Waters, a Democrat from California and a top member of the House Financial Services Committee, according to a person familiar with the matter.

Silicon Valley Bank’s downward spiral accelerated with incredible speed this week, but its problems had been brewing for more than a year. Founded in 1983, the bank has long been an essential lender for start-ups and their managers.

Although the bank billed itself as a “partner in the innovation economy,” some decidedly old-fashioned decisions led to this moment.

Cash-rich from high-flying start-ups that had raised a lot of money from venture capitalists, Silicon Valley Bank did what all banks do: it kept a fraction of the deposits in hand and invested the rest. in hopes of earning a comeback. In particular, the bank placed a large portion of customer deposits in long-term treasury bills and mortgage bonds that promised modest, steady returns when interest rates were low.

It had worked well for years. The bank’s deposits doubled to $102 billion at the end of 2020, from $49 billion in 2018. A year later, in 2021, it had $189.2 billion in its coffers, the start -ups and tech companies making heady profits during the pandemic.

But he bought huge amounts of bonds just before the Federal Reserve began raising interest rates just over a year ago, then failed to plan for the possibility that the interest rates are rising very quickly. As rates rose, these holdings became less attractive because the new government bonds paid more interest.

It might not have mattered until the bank’s customers demanded a refund. But because the inflow of start-up funds slowed as interest rates rose, the bank’s customers began to withdraw more of their money.

To pay for these redemption requests, Silicon Valley Bank sold some of its investments. In its surprise revelation on Wednesday, the bank admitted it lost nearly $2 billion when it was forced to sell some of its holdings.

“It’s the classic Jimmy Stewart problem,” Ms Bair said, referring to the actor who played a banker trying to avoid a bank run in the film ‘It’s a Wonderful Life’. “If everyone starts withdrawing money at the same time, the bank has to start selling some of its assets to return money to depositors.”

These fears have raised concerns among investors about some regional banks. Like Silicon Valley Bank, Signature Bank is also a lender that caters to the startup community. He is perhaps best known for his ties to former President Donald J. Trump and his family.

First Republic Bank, a San Francisco-based lender specializing in wealth management and private banking services for wealthy tech clients, recently warned that its ability to turn a profit was being hampered by rising interest rates. interest. Its Phoenix-based counterpart in the wealth management industry, Western Alliance Bank, faces similar pressures.

Separately, another bank, Silvergate, said on Wednesday that it was closing operations and liquidating after suffering heavy losses due to its exposure to the cryptocurrency industry.

A spokesperson for First Republic responded to a request for comment by sharing a filing the bank filed with the Securities and Exchange Commission on Friday stating that its deposit base was “strong and very well diversified” and that its ” liquidity position remains very solid”.

A Western Alliance spokeswoman pointed to a bank press release on Friday outlining the state of its balance sheet. “Deposits remain strong,” the statement said. “Asset quality remains excellent.”

Representatives for Signature and Silicon Valley Bank had no comment. Federal Reserve and FDIC officials declined to comment.

Some banking experts pointed out on Friday that a bank as big as Silicon Valley Bank might have better managed its interest rate risks if parts of the Dodd-Frank financial regulatory package, put in place after the 2008 crisis , had not been canceled under President Atout.

In 2018, Mr. Trump signed a bill that eased regulatory scrutiny of many regional banks. Silicon Valley Bank chief executive Greg Becker was a strong supporter of the change, which reduced the frequency with which banks with assets between $100 billion and $250 billion had to undergo Fed stress tests. .

Mr. Becker, who was on the board of directors of the San Francisco Fed, had not been on it since Friday, a Fed spokesman said.

At the end of 2016, Silicon Valley Bank’s asset size was $45 billion. It had jumped to over $115 billion by the end of 2020.

Friday’s upheavals drew uncomfortable parallels with the 2008 financial crisis. While it’s not uncommon for small banks to fail, the last time a bank of this magnitude collapsed was in 2008, when the FDIC took over Washington Mutual.

The FDIC rarely takes control of banks when the markets are open, preferring to put a failing institution into receivership on a Friday after it closes for business for the weekend. But the banking regulator issued a press release in the early hours of trading on Friday, saying it had created a new bank, National Bank of Santa Clara, to hold deposits and other assets from the bankruptcy.

The regulator said the new entity would be operational by Monday and checks issued by the old bank would continue to clear. While customers with deposits of up to $250,000 — the maximum covered by FDIC insurance — will be reimbursed, there is no guarantee that depositors with larger amounts in their accounts will get all their money back.

These customers will receive certificates for their uninsured funds, meaning they would be among the first to be reimbursed with recovered funds while the FDIC keeps Silicon Valley Bank in receivership – although they may not recover. all their money.

When California bank IndyMac went bankrupt in July 2008, it, like Silicon Valley Bank, had no immediate buyer. The FDIC placed IndyMac in receivership until March 2009, and large depositors ultimately received only 50% of their uninsured funds. When Washington Mutual was taken over by JPMorgan Chase, account holders were compensated.

Maureen Farrel And Joe Rennison contributed report.