Within a 48-hour period, Silicon Valley Bank (SVB) went from being the “Bank of Venture-Backed Tech Startups” to making history as the second biggest bank collapse in U.S. history.
Now the feds have shuttered the bank.
Financial regulators have closed Silicon Valley Bank and taken control of its deposits, the Federal Deposit Insurance Corp. announced Friday, in what is the largest U.S. bank failure since the global financial crisis more than a decade ago.The collapse of SVB, a key player in the tech and venture capital community, leaves companies and wealthy individuals largely unsure of what will happen to their money.According to press releases from regulators, the California Department of Financial Protection and Innovation closed SVB and named the FDIC as the receiver. The FDIC in turn has created the Deposit Insurance National Bank of Santa Clara, which now holds the insured deposits from SVB.The FDIC said in the announcement that insured depositors will have access to their deposits no later than Monday morning. SVB’s branch offices will also reopen at that time, under the control of the regulator.According to the press release, SVB’s official checks will continue to clear.
This collapse occurred after a great deal of fiscal drama, including a call to police when some investors went to the bank to pull out their cash.
…[T]he bank’s parent SVB Financial had reportedly tapped outside advisers to facilitate a potential sale. “Large financial institutions” were exploring a potential acquisition of SVB Financial, CNBC reported, citing sources familiar with the matter.Earlier in the morning, building managers at Silicon Valley Bank’s Manhattan branch reportedly called the police after a group of tech founders showed up and attempted to pull out their cash.
What happened? It appears the root cause of this bank collapse stems from federal requirements to begin with. After the last financial crisis of 2008, regulators required banks to hold more capital. So, banks opted to hold Treasuries and Mortgage Securities and apparently treated them as if they had no risk.
However, it turns out pumping billions of dollars into the economy in the name of “science” and “equity” actually had consequences.
Matt Levine, a Bloomberg opinion columnist covering finance as a former editor of Dealbreaker and former investment banker at Goldman Sachs, provides a great review of what happened when the Fed started to play with interest rates to stem inflation.
….[I]n traditional banking, you make your money in part by taking credit risk: You get to know your customers, you try to get good at knowing which of them will be able to pay back loans, and then you make loans to those good customers. In the Bank of Startups, in 2021, you couldn’t really make money by taking credit risk: Your customers just didn’t need enough credit to give you the credit risk that you needed to make money on all those deposits. So you had to make your money by taking interest-rate risk: Instead of making loans to risky corporate borrowers, you bought long-term bonds backed by the US government.The result of this is that, as the Bank of Startups, you were unusually exposed to interest-rate risk. Most banks, when interest rates go up, have to pay more interest on deposits, but get paid more interest on their loans, and end up profiting from rising interest rates. But you, as the Bank of Startups, own a lot of long-duration bonds, and their market value goes down as rates go up. Every bank has some mix of this — every bank borrows short to lend long; that’s what banking is — but many banks end up a bit more balanced than the Bank of Startups.
Despite the FDIC intervention, other banks’ stocks are being hit as worry and concern about the industry spread.
First Republic Bank and PacWest Bancorp both plunged Friday as the upheaval at SVB Financial Group spread to other lenders.Shares of First Republic tumbled 51% to $47.25 at 9:49 a.m. in New York, while PacWest dropped 37%, triggering trading halts for both.SVB, the parent of Silicon Valley Bank, plunged as much as 69% ahead of the US market open, before trading in the stock was halted pending news. On Thursday, the shares plummeted 60%, fueling a 7.7% drop in the KBW Bank Index, while First Republic and PacWest also posted record one-day declines.“The funding pressures facing SIVB are highly idiosyncratic and should not be viewed as a read-across to other regional banks,” Morgan Stanley analysts led by Manan Gosalia said in a note Friday. “That said, we have always believed that SIVB has more than enough liquidity to fund deposit outflows related to venture capital client cash burn.”
Finance experts indicate that the FDIC will work quickly to avoid panic.
For the FDIC, the immediate goal is to quell fears of systemic risk to the banking system, said Mark Wiliams, who teaches finance at Boston University. Williams is quite familiar with the topic as well as the history of SVB. He used to work as a bank regulator in San Francisco.Williams said the FDIC has always tried to work swiftly and to make depositors whole, even if when the money is uninsured. And according to SVB’s audited financials, the bank has the cash available — its assets are greater than its liabilities — so there’s no apparent reason why clients shouldn’t be able to retrieve the bulk of their funds, he said.“Bank regulators understand not moving quickly to make SVB’s uninsured depositors whole would unleash significant contagion risk to the broader banking system,” Williams said.
Bob Elliot is the Chief Information Officer for Unlimited Funds and a CNBC contributor. He indicates that a great deal of work will be done ahead of Monday’s stock market open.
CLICK HERE FOR FULL VERSION OF THIS STORY