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Silicon Valley Bank shut down by FDIC

Run on deposits prompts collapse by Compiled by Democrat-Gazette Staff From Wire Reports | March 11, 2023 at 4:56 a.m.
An employee stands at the door of Silicon Valley Bank in Santa Clara, Calif., on Friday as people wait outside. Federal regulators shut the bank down as depositors scrambled to withdraw funds. (AP/Jeff Chiu)

The second-largest bank failure in U.S. history rocked the tech industry and sent ripples of anxiety throughout the financial sector Friday as Silicon Valley Bank went from being a key part of the tech ecosystem to collapsing in a matter of hours.

The bank, which largely serves tech companies and venture capitalists, was shut down by regulators and taken over by the federal government as depositors scrambled to withdraw money after a surprise filing from the firm Wednesday night that it had sold $21 billion in assets and was selling more of its own stock to shore up its balance sheet.

Analysts say because the bank, owned by SVB Financial, was heavily exposed to the tech industry, there is little chance of contagion in the banking sector similar to the chaos in the months leading up to the 2008 downturn. Major banks are believed to have sufficient capital to avoid a similar situation, though the sector has been under pressure all week.

"Whether there is contagion and effects that follow onto other financial institutions is something regulators are incredibly focused on right now, because this is a traditional bank run. That's what is happening," Natasha Sarin, a former top official in the Biden administration's Treasury Department, said. "You have to work for any systemic effects that are going to arise."

Silicon Valley Bank's failure came with incredible speed, with some analysts earlier Friday suggesting it was a good company and still likely a wise investment. Bank executives had been looking to raise capital or find additional investors in the firm. But trading in its shares was halted before the opening bell Friday because of extreme volatility.

Just before 11 a.m. Thursday, the Federal Deposit Insurance Corporation announced it was shuttering the bank. Notably the FDIC did not wait until the close of business, as is typical in an orderly wind down of a financial institution. The FDIC did not immediately find a buyer for the bank's assets, signaling how fast depositors had cashed out.

The bank's deposits will now be locked up in receivership. Silicon Valley Bank had $209 billion in assets and $175.4 billion in deposits, the FDIC said in a statement. It remained unclear Friday how much of its deposits were above the $250,000 insurance limit, but previous regulatory reports showed that much of Silicon Valley Bank's deposits were above that limit.

The FDIC said deposits below the $250,000 limit will be available Monday morning.

Publicly traded shares in the Santa Clara, Calif.-based bank plummeted 60% Thursday, the day after the company reported it sold the $21 billion in assets, and was selling more stock amid concerns of shrinking deposits, higher interest rates by the Federal Reserve and the rocky economy.

"No bank understands startups and tech the way they do," said Antoine Nivard, co-founder and general partner at Blank Ventures. "They have a 40-year reputation earned the hard way, built on the most extensive network of insider relationships with Silicon Valley's most important players."

Major financial institutions including Bank of America, Citigroup and JPMorgan were not immune to the Thursday sell-off, falling between 4% and 17% on the day, before posting mixed results Friday.

Tech investors and founders say the sell-off was unexpected, and some had encouraged startups with money deposited with the bank to withdraw. Others had cautioned investors and CEOs not to act too hastily, warning that a full run on the bank was expected to damage many companies that had deposited money with the firm.

"I am hearing from dozens of founders about what to do at SVB," Howard Lerman, co-founder of business software company Yext, posted on Twitter before the FDIC shuttered the bank. "It's an all out bank run."

Silicon Valley Bank is federally insured, meaning that even if it cannot pay its depositors, they will get some money from the U.S. government. A spokesperson for the bank did not return a request for comment.

Over the past year, share prices for tech companies have cratered as high interest rates and concerns about the economy cut into funding available for investments in big tech projects and startups.

Big and small tech companies have laid off tens of thousands of workers -- though most are still making money and growing.

CEOs at larger tech companies have blamed the layoffs on over-hiring early during the pandemic, while venture capitalists have said the pullback in new startup funding was a needed correction from years of over-exuberance.

Still, the panic Thursday and the ensuing Silicon Valley Bank shutdown revealed deeper fears that the economic situation in Silicon Valley will get worse.

Arjun Sethi, co-founder of venture investor Tribe Capital, said in a memo that the industry was one-third of the way through "the desert" and that founders need to prepare for new funding to become scarce.

"Our advice to founders: Call every debt line, close all primary rounds, do it now, and be willing to make concessions," Sethi said before Silicon Valley Bank's assets were seized. "The restructuring will be significant."

Shares in other banks fell Thursday in New York as concerns over Silicon Valley Bank initially spread. First Republic Bank, which also serves many California tech companies, fell 16.5%. JPMorgan Chase fell 5.4% and Wells Fargo fell 6.2% on the day.

In Friday trading, stock losses were again heaviest at regional banks. First Republic Bank tumbled another 14.8% after filing a statement with regulators to reiterate its "strong capital and liquidity positions."

Charles Schwab lost another 11.7% after dropping 12.8% Thursday "as investors stretched for read-throughs" from the Silicon Valley Bank crisis, according to analysts at UBS. The analysts called investor concerns "logical but superficial" because of differences in how companies get their deposits.

Larger banks, which have been stress-tested by regulators after the 2008 financial crisis, held up better. JPMorgan Chase rebounded Friday for a 2.5% gain, for example.

The tech industry has been grappling with the changing economy and renewed pressure from Wall Street investors to cut costs and focus on profit after years of spending money to continuously grow their businesses.

Early during the pandemic, big companies such as Amazon, Facebook parent Meta Platforms and Google parent Alphabet hired tens of thousands of workers to take advantage of the growth in demand for digital services as covid-19 lockdowns forced people to work, shop and recreate via the internet.

But as consumers returned to their in-person lives, and stimulus funding dried up, tech companies that had benefited the most from the pandemic-driven boom saw stock prices plummet. Over the past several months, most of them have cut costs and fired workers, something few tech companies have had to do over the past decade.

A bank failure of this magnitude is expected to trickle down to taxpayers. Federal regulators will have to sell Silicon Valley Bank's assets to cover its advances. If the federal deposit insurance fund is used, it will need to be replenished, said Cornelius Hurley, an adjunct banking law professor at Boston University School of Law.

Information for this article was contributed by Gerrit De Vynck, Rachel Lerman, Jeff Stein and staff of The Washington Post; and Ken Sweet, Stan Choe and staff of The Associated Press.

Print Headline: Silicon Valley Bank shut down by FDIC


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