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On Friday, the Federal Deposit Insurance Corporation declared bankruptcy of Silicon Valley Bank after a massive run on the lender. This was the biggest bank failure since 2008 and caused widespread concern that it could undermine confidence in the entire banking system.
Silicon Valley Bank, which specialized in financing tech companies during the pandemic, has seen its business suffer due to a slowdown in venture capital funding. Its shares have fallen by double digits and it failed to secure fresh capital.
On Thursday, sources familiar with the situation revealed to AFP that SVB, a fund for start-ups that offers loans, was one of the leading lenders to US tech and healthcare startups. As a precautionary measure, several venture capital firms investing in those sectors have advised their portfolio companies to withdraw money from SVB as a precautionary measure.
The bank's issues stem from an unusually large amount of deposits it holds, many of which are investment-grade bonds which the bank paid no interest on but which have lost value due to Federal Reserve rate hikes in recent years. As a result, SVB is losing money on many of its assets, leaving little left for itself to sustain itself.
Its balance-sheet is beset with losses, including a major one in January when it had to sell nearly $1.75 billion of US Treasury bonds and stock at a loss in order to cover rapidly diminishing customer deposits. This development has raised fears that other banks could face similar difficulties and be forced to cover losses through bond sales as well.
Fearing contagion from the collapse, investors have sold off shares in SVB and other major US banks, wiping out billions of dollars worth of value. European banking stocks also suffered on Friday, with German lenders Commerzbank and BofA taking the brunt.
Some analysts contend SVB's challenges are unique and indicative of how vulnerable the banking industry may be to funding pressures than investors would like to believe. Nonetheless, the Fed's rapid rate hikes have only compounded existing interest-rate-related pressures on the bond market, now endangering many banks' investment-grade balance sheets.
Banks' hesitation to make long-term bets on speculative tech and VC businesses has resulted in large deposit outflows from these enterprises, pushing SVB close to bankruptcy.
On Thursday, SVB revealed it needed to sell a large portion of its bond portfolio at a loss in order to cover rapidly declining deposits. The bank said the sale was necessary as they had no other options left and needed the money quickly. Shares in the bank plunged 60% as it warned of larger losses coming up. The company said they were in discussions regarding their next steps.
On Friday morning, the FDIC has declared Silicon Valley Bank - a major player in the technology industry - bankrupt. This marks one of America's biggest bank failures ever and signals that cheap money may be coming to an end.
At its closing, SVB Bank--the 16th largest in America with more than $209 billion in assets--became another victim to depositor flight and an ailing bond portfolio. Last week, it sold $21 billion worth of bonds, triggering $1.8 billion worth of unrealized losses on its balance sheet and endangering its liquidity.
Despite the bank's efforts to raise cash, investors and depositors began withdrawing their funds from SVB accounts before the company shut down. One San Francisco-based startup reported to Reuters that they successfully wired all of their funds out of SVB into their primary account by 4 pm Thursday afternoon.
SVB's shareholders are feeling the brunt of SVB's disappointing results, but this also highlights a larger systemic risk within the banking industry. Low interest rates have driven up interest rates, decreasing the value of many banks' bond holdings.
That has further destabilized the liquidity of many other banks, including SVB. As a consequence, the bank has lost much of its equity.
SVB's closure came as a shock, given its prominence as the lender of choice for many tech startups that had gone public in 2022. SVB was nearly half of all venture-backed startups that went public this year and an essential partner to many early-stage businesses that can't afford to lose access to capital.
The crisis at SVB illustrates the vulnerability of startups, raising concerns about how they will fare during an economic downturn which is already impacting many. It also raises queries as to how companies manage their cash when unable to obtain financing from banks.
SVB's liquidity issues have compounded, as the bank faces shrinking deposits due to clients' cash burn rates and declining VC investment. With rising rates, borrowing has become even more challenging for SVB, making its deposits even less valuable.
On Friday, Silicon Valley Bank, a lender to venture-backed companies, was forced to close its doors due to a run on its deposits. It was the first FDIC-insured bank to fail this year and caused global investors to write off billions of dollars in market value.
SVB, with 17 branches across California and Massachusetts, was a go-to lender for tech startups. Additionally, it provided treasury management, international banking, wealth advisory and online banking services. Furthermore, SVB served as an influential venture debt market provider - an alternative source to traditional VC funding.
But the decline at SVB serves as a stark reminder of the larger dangers facing the banking sector. To combat inflation, central banks have raised interest rates at their fastest pace in decades, driving borrowing costs higher for businesses and individuals alike. According to Karl Schamotta, chief market strategist at Corpay, this has created vulnerabilities in large institutions' bond holdings.
On Friday morning, the FDIC declared the closure of SVB in a statement. They noted that all insured depositors had been transferred to a new entity called Deposit Insurance National Bank of Santa Clara (DINB), and that its main office and all 17 branches would reopen on March 13th; providing full access to funds by Monday morning.
SVB shares have fallen more than 60% this week, leading to Friday trading being halted before the market opened. Investors feared that a $1.75 billion capital raise wouldn't be enough to stem the loss experienced by several technology firms that depend on SVB for financing needs.
Venture-backed firms and other venture-backed firms have been encouraging their portfolio companies to take money out of the bank. But SVB's depositors exceed the $250,000 insurance limit applied to other FDIC-insured banks, so a run on the bank does not suffice as evidence for regulators to take action, according to Bloomberg News' analysis.
SVB's woes have only compounded due to the collapse of another West Coast lender, PacWest Bancorp. This has caused concern and a drop in stock prices for several prominent West Coast lenders such as First Republic Bank, PacWest Bancorp and Western Alliance Bancorporation which all experienced losses of more than 20% on Friday.
On Friday, the California Department of Financial Protection and Innovation announced it was taking control of Silicon Valley Bank to safeguard deposits. SVB, which serves a number of tech companies along the West Coast, had become well-known for its role in financing an influx of West Coast startups.
However, SVB Bank is struggling to raise capital amid a funding winter caused by relentless increases in borrowing costs and rising inflation. This has made it difficult for venture capital firms to deploy their funds, while at the same time SVB's clients were pulling money out of the bank as well.
On Thursday afternoon, a UK-based venture capital firm that asked to remain anonymous due to being anonymous has pulled "single digit millions" from multiple accounts at SVB. This follows an apparent surge in founders moving their money away from banks, according to sources and Reuters interviews.
Some Venture Capitalists (VCs) have advised their clients to remove all assets from SVB, while others advised them to diversify their portfolios and steer clear of the bank altogether. The surge in withdrawals indicates that investors and tech founders alike are anxious about where to place their cash, potentially impacting the entire economy.
Investors are worried about SVB's future, and its collapse has sparked a sell-off in bank stocks that sent the S&P 500 below its 200-day moving average for the first time since 2000. But February jobs reports still point to a strong labor market, suggesting interest rates could rise again soon enough.
In the end, SVB's future depends on how California regulators handle the situation. According to FDIC Chairman Christopher Whalen, those in charge are likely going to sell SVB's assets, but that process may take time and may include dividend payments for uninsured depositors.
The regulator has already declared it will begin paying a dividend to those with insured accounts up to $250,000. This allows some owners of bank deposits to recoup some value for their investments. However, how much the regulator receives from either selling Silicon Valley Bank's assets or having another bank take ownership of its remaining assets remains uncertain.