Silicon Valley Bank seized by US FDIC as depositors pull cash

The United States Federal Deposit Insurance Corporation (FDIC) seized the assets of Silicon Valley Bank on Friday, marking the largest bank failure since Washington Mutual at the height of the 2008 financial crisis.

The bank failed after depositors, mostly technology workers and venture capital-backed companies, began withdrawing their money – creating a run on the bank.

Silicon Valley Bank was heavily exposed to the tech industry and there is little chance of contagion in the banking sector as there was in the months leading up to the Great Recession more than a decade ago. Big banks have sufficient capital to avoid a similar situation.

The FDIC ordered the closure of Silicon Valley Bank and immediately took possession of all its deposits on Friday. The bank had $209bn in assets and $175.4bn in deposits at the time of failure, the FDIC said in a statement. It was unclear how many of the deposits were above the $250,000 insurance limit.

Notably, the FDIC did not announce a buyer of Silicon Valley’s assets, which typically occurs when there is an orderly wind-down of a bank. The FDIC also seized the bank’s assets in the middle of the business day, a sign of how dire the situation had become.

Silicon Valley Bank’s financial health was increasingly in question this week after the bank announced plans to raise up to $1.75bn to strengthen its capital position amid concerns about higher interest rates and the economy. Shares of SVB Financial Group, the parent company of Silicon Valley Bank, had plummeted by nearly 70 percent before trading was halted ahead of the opening bell on the Nasdaq.

CNBC news reported that attempts to raise capital failed and the bank was now looking to sell itself.

Bruising week

As the 16th-largest bank in the country, Silicon Valley Bank is not small. It acts as a major financial conduit for venture capital-backed (VC-backed) companies, which have been hit hard in the past 18 months as the Federal Reserve has raised interest rates and made riskier tech assets less attractive to investors.

VC-backed companies were reportedly being advised to pull at least two months’ worth of “burn” cash out of Silicon Valley Bank to cover their expenses. Typically, VC-backed companies are not profitable and how quickly they use the cash they need to run their businesses – their so-called “burn rate” – is an important metric for investors.

Shares of diversified banks like Bank of America and JPMorgan pulled out of an early slump due to data released on Friday by the Department of Labor that showed wage gains slowed in February. But regional banks, particularly those with heavy exposure to the tech industry, were in decline.

Regardless, it has been a bruising week.

The S&P 500 regional banks index dropped by 4.3 percent, bringing its loss this week to 18 percent, its worst week since 2009. The S&P 500 banks index, which includes large and medium banks, fell by 0.5 percent, bringing its loss this week to more than 11.5 percent.

The problems at SVB underscore how a campaign by the US Federal Reserve and other central banks to fight inflation by ending the era of cheap money is exposing vulnerabilities in the market.

Global borrowing costs have risen at the fastest pace in decades over the last year as the Federal Reserve lifted US rates by 450 basis points from near zero, while the European Central Bank hiked the euro zone’s by 300 basis points.

‘Chaos’

As higher interest rates caused the market for initial public offerings to shut down for many startups and made private fundraising more costly, some clients of the Silicon Valley Bank started pulling money out.

To fund the redemptions, the bank sold on Wednesday a $21bn bond portfolio consisting mostly of US Treasuries. The bank announced on Thursday it would sell $2.25bn in common equity and preferred convertible stock to fill its funding hole.

One United Kingdom-based principal at a venture capital firm, who asked to be anonymous because he is not authorised to speak to the press, told Reuters that his firm had rushed to pull “single-digit millions” from four accounts at Silicon Valley Bank late on Thursday.

The source characterised the situation as “chaos”.

The technology sector has been hit hard and stress has appeared in other corners of the market as rates rise.

Sources familiar with the situation told Reuters that on Thursday some startups had advised their founders to pull out money from Silicon Valley Bank as a precautionary measure.

Short sellers in the bank profited by $717m since Wednesday’s close, according to analytics firm Ortex.

“The market is tired of companies that do business with unprofitable companies or that are unprofitable themselves,” said David Trainer, CEO of New Constructs, an investment research firm.

Secretary of the Treasury Janet Yellen told legislators on Capitol Hill on Friday the department was aware of recent developments and was monitoring the situation, calling it “a matter of concern” when banks experience losses, according to CNBC.

US regulators were seen arriving at the bank’s California offices on Friday, Bloomberg News reported.