Silicon Valley Bank Collapses and is Taken Over by Federal Regulators

Silicon Valley Bank, a bank that caters to many of the world’s most powerful tech investors, collapsed on Friday and was taken over by federal regulators, becoming one of the largest lenders to fail since the 2008 Global Financial Crisis.

California’s banking regulators shut down Silicon Valley Bank and put it into receivership under the Federal Deposit Insurance Corp. (FDIC), effectively giving control of the bank to the FDIC, which created a new entity to oversee it.

Regulators announced the takeover after what was effectively a run on the bank, as depositors rushed to withdraw their money amid fears SVB wouldn’t be able to meet redemption requests.

Based in Santa Clara, Calif.

Silicon Valley Bank’s clients included venture capital firms and startups, and it became a big player in the tech sector, successfully competing with bigger-name banks.

SVB had about $174 billion in deposits, but in recent months, many of Silicon Valley Bank’s clients had been withdrawing money at a time when the tech sector as a whole has been suffering.

SVB said earlier this week that in order to make good on those withdrawals, it had to sell part of its bond holdings at a steep loss of $1.8 billion.

Bonds and stocks have been hammered since last year, as the Federal Reserve has raised interest rates aggressively, and SVB also noted it wanted to pare down its bond portfolio to avoid further losses.

However, this announcement spooked the bank’s clients, who got worried about SVB’s viability, and then proceeded to withdraw even more money from the bank, leading to a major slump in SVB’s shares.

The bank’s stock price fell by 60% on Thursday and as its share price continued to sink overnight.

Trading was halted on Friday morning, and by midday, SVB had been taken over by the FDIC.

Though the problems appear to be isolated at SVB, the run on the bank sparked concerns about the banking sector as a whole.

On Thursday, shares of all kinds of lenders, including the big banks, sagged.

J.P. Morgan, Wells Fargo, and Bank of America were all down about 5%.

Yet by Friday, fears about the health of the broader banking sector had eased even before the FDIC took over SVB.

Bank analysts at Morgan Stanley said in a note “the funding pressures facing” Silicon Valley Bank “are highly idiosyncratic and should not be viewed as a read-across to other regional banks.”

“We do not believe there is a liquidity crunch facing the banking industry,” they wrote.

The entity created by federal regulators to oversee SVB, the Deposit Insurance National Bank of Santa Clara, has quite a few things to sort out.

The FDIC said those with insured deposits with SVB, typically up to $250,000, would be able to access their money by no later than Monday.

The fate of those with deposits at SVB that exceed insurance limits is less certain, however, with the FDIC saying they will receive an “advance dividend” for a portion of their funds along with “certificates” accounting for their uninsured funds.

The regulator did not spell out what that would entail for these uninsured depositors.

Credit: https://www.npr.org/2023/03/10/1162599556/silicon-valley-bank-collapse-failure-fdic-regulators-run-on-bank

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