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Silicon Valley Bank fails in largest bank collapse since 2008 crisis
US regulators seize SVB’s assets after a run on the bank, as global institutions monitor situation closely
Why did Silicon Valley Bank fail?
Kalyeena Makortoff Banking correspondent, Kari Paul in Oakland, and agencies
Fri 10 Mar 2023 23.27 GMT
US regulators rushed to seize the assets of top tech lender Silicon Valley Bank on Friday after a run on the bank, marking the largest failure of such an institution since the height of the financial crisis more than a decade ago.
SVB logo through rain
Why did Silicon Valley Bank fail?
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Silicon Valley Bank (SVB), the nation’s 16th largest bank, failed after depositors – mostly technology workers and venture capital-backed companies – hurried to withdraw their money this week as anxiety over the bank’s situation spread.
Global institutions including the Bank of England are monitoring the situation closely amid concerns that the turmoil could put customers’ deposits at risk and lead to further panic across the financial system.
“Fear is contagious,” said Angela Lee, a Columbia Business School professor of venture capitalism. “Bank runs can start on a rumor and this is much bigger than a rumor. I worry about folks overreacting to this and overcorrecting.”
SVB had prompted a global sell-off in banking stocks after it launched a rescue share sale to plug a near-$2bn (£1.7bn) hole in its finances.
The bank lost the funds when it sold a portfolio of bonds in response to a decline in customer deposits. Those bonds had dropped in value as a result of rising interest rates, leaving SVB with a shortfall.
Its US-listed shares initially plunged 60% on Thursday, and were halted on Friday after tumbling 66% in pre-market trading, before regulators stepped in.
The troubles facing SVB were relatively unique – given it serves startups in the tech sector, for which funding has dried up in recent months. Silicon Valley was heavily exposed to the tech industry and there is little chance of contagion in the banking sector similar to the chaos in the months leading up to the recession more than a decade ago. The biggest banks – those most likely to cause a systemic economic issue – have healthy balance sheets and plenty of capital.
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However, those troubles raised broader fears that the recent increases in interest rates have affected the value of other banks’ bond portfolios, which tend to fall in price when interest rates rise.
There were concerns about how that could affect lenders’ capital levels, which are meant to offset riskier parts of banks’ balance sheets. Those fears prompted a drop in UK banking stocks, which the Bank of England’s regulatory arm, the Prudential Regulation Authority (PRA), is closely monitoring.
The Guardian understands the PRA is keeping an eye on market movements, and is speaking with firms it supervises – including high street banks such as Barclays, NatWest and Lloyds Banking Group – amid fears there could be further contagion from market jitters over the turmoil affecting SVB.
However, it is understood that the PRA believes that the UK banks it monitors are resilient, given that bond values are usually part of annual stress testing, and that most have seen their income rise as a result of higher interest rates in recent months.
It was not immediately clear what the implications for SVB’s UK operations would be, though its roughly 3,500 customers were understood to have been pulling deposits in light of the turmoil. That is despite the subsidiary having assured that its operations were “ringfenced” from the US parent firm, and that clients’ deposits were protected up to £85,000 by the Financial Services Compensation Scheme.
A Bank of England spokesperson said: “Silicon Valley Bank UK is supervised and authorised by the Prudential Regulation Authority. The UK bank has no personal retail depositors. We are aware of the issues impacting the firm and are closely engaging with it and overseas regulators.”
However, the troubles have raised broader fears that the recent increases in US interest rates have affected the value of other banks’ bond portfolios, which tend to fall in price when interest rates rise. The collapse of Silicon Valley pushed shares of almost all financial institutions lower on Friday.
Silicon Valley Bank’s failure arrived with incredible speed, with some industry analysts on Friday suggesting it was a good company and still probably a wise investment. Silicon Valley Bank executives were trying to raise capital early Friday and find additional investors. However, trading in the bank’s shares was halted before the opening bell due to extreme volatility.
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Shortly before noon ET, the Federal Deposit Insurance Corporation moved to shutter the bank. Notably, the FDIC did not wait until the close of business to seize the bank, as is typical in an orderly wind down of a financial institution. The FDIC could not immediately find a buyer for the bank’s assets, signaling how fast depositors had cashed out. The bank’s remaining uninsured deposits will now be locked up in receivership.
Santa Clara Police officers exit Silicon Valley Bank in Santa Clara, California.
Santa Clara police officers exit Silicon Valley Bank in Santa Clara, California. Photograph: Jeff Chiu/AP
The bank had $209bn in total assets at the time of failure, the FDIC said. It was unclear how much of its deposits were above the $250,000 insurance limit at the moment, but previous regulatory reports showed that much of Silicon Valley Bank’s deposits exceeded that limit.
As its name implied, Silicon Valley Bank was a major financial conduit between the technology sector, its founders and startups as well as its workers. Hundreds of companies held their operating capital with the bank, and it was seen as good business sense to develop a relationship with Silicon Valley Bank if a founder wanted to find new investors or go public.
“We saw building a relationship with Silicon Valley Bank as a logical step, given their reach,” said Ashley Tyrner, CEO of FarmboxRx, a company that delivers food and medicine to Medicaid and Medicare recipients. While Tyrner has money in other banks and can make payroll, she said a good portion of her business’s profits were now locked up with the bank.
But Silicon Valley’s connections to the tech sector became a liability rapidly. Technology stocks have been hit hard in the past 18 months after a growth surge during the pandemic and layoffs have spread throughout the industry.
Tyrner said she had spoken to several friends who are backed by venture capital. She described those friends as being “beside themselves” over the bank’s failure. Tyrner’s chief operating officer tried to withdraw her company’s funds on Thursday, but failed to do so in time.
“One friend said they couldn’t make payroll today and cried when they had to inform 200 employees because of this issue,” Tyrner said.
While the SVB meltdown is unlikely to have a major impact outside of tech, it is going to be “catastrophic” for startups, Columbia professor Lee said, and the broader Silicon Valley atmosphere.
“Startups are not able to access their funds and companies are going to go out of business to cover this,” she said. “The sentiment coming out of this is going to be devastating globally.”
The Associated Press contributed reporting
Guardian.
Why did Silicon Valley Bank fail?
Shutdown and takeover of bank by regulators can be traced to the Fed raising interest rates and risk-averse investors
US regulators seize assets of Silicon Valley Bank amid institution’s failure
Reuters
Fri 10 Mar 2023 22.20 GMT
The shutdown and takeover of Silicon Valley Bank by regulators on Friday can be traced to the US Federal Reserve raising interest rates and souring the risk appetite of investors.
Here is the sequence of events that led to the failure:
Federal Reserve raises rates
The Federal Reserve has been raising interest rates from their record-low levels since last year in its bid to fight inflation. Investors have less appetite for risk when the money available to them becomes expensive due to the higher rates. This weighed on technology startups – the primary clients of Silicon Valley Bank – because it made their investors more risk-averse.
Some Silicon Valley Bank clients face cash crunch
As higher interest rates caused the market for initial public offerings to shut down for many startups and made private fundraising more costly, some Silicon Valley Bank clients started pulling money out to meet their liquidity needs. This culminated in Silicon Valley Bank looking for ways this week to meet its customers’ withdrawals.
Bank sells bond portfolio at a loss
To fund the redemptions, on Wednesday Silicon Valley Bank sold a $21bn bond portfolio consisting mostly of US Treasuries. The portfolio was yielding it an average 1.79%, far below the current 10-year Treasury yield of about 3.9%. This forced SVB to recognize a $1.8bn loss, which it needed to fill through a capital raise.
SVB announces stock sale
SVB announced on Thursday that it would sell $2.25bn in common equity and preferred convertible stock to fill its funding hole. Its shares ended trading on the day down 60%, as investors fretted that the deposit withdrawals might push it to raise even more capital.
Stock sale collapses
Some SVB clients pulled their money from the bank on the advice of venture capital firms such as Peter Thiel’s Founders Fund, Reuters reported. This spooked investors such as General Atlantic that SVB had lined up for the stock sale, and the capital raising effort collapsed late on Thursday.
SVB goes into receivership
SVB scrambled on Friday to find alternative funding, including through a sale of the company. Later in the day, however, the Federal Deposit Insurance Corporation (FDIC) then announced that SVB was shut down and placed under its receivership. The FDIC added that it would seek to sell SVB’s assets and that future dividend payments may be made to uninsured depositors.
111.Silicon Valley Bank collapse marks 2nd biggest bank failure in U.S. history
Bank, the 16th largest in U.S., failed after depositors hurried to withdraw money
The Associated Press · Posted: Mar 10, 2023 7:55 PM EST | Last Updated: March 10
Two police officers exit a bank.
Regulators rushed Friday to seize the assets of one of Silicon Valley's top banks, marking the largest failure of a U.S. financial institution since the height of the financial crisis almost 15 years ago.
Silicon Valley Bank, the 16th-largest bank in the U.S., failed after depositors hurried to withdraw money this week amid anxiety over the bank's health. It was the second biggest bank failure in U.S. history after the collapse of Washington Mutual in 2008.
The bank served mostly technology workers and venture capital-backed companies, including some of the industry's best-known brands.
"This is an extinction-level event for startups," said Garry Tan, CEO of Y Combinator, a startup incubator that launched Airbnb, DoorDash and Dropbox and has referred hundreds of entrepreneurs to the bank.
"I literally have been hearing from hundreds of our founders asking for help on how they can get through this. They are asking, 'Do I have to furlough my workers?'"
Little chance of chaos spreading
There appeared to be little chance of the chaos spreading in the broader banking sector, as it did in the months leading up to the Great Recession. The biggest banks — those most likely to cause an economic meltdown — have healthy balance sheets and plenty of capital.
Nearly half of the U.S. technology and health-care companies that went public last year after getting early funding from venture capital firms were Silicon Valley Bank (SVB) customers, according to the bank's website.
The bank also boasted of its connections to leading tech companies such as Shopify, ZipRecruiter and one of the top venture capital firms, Andreesson Horowitz.
Tan estimated that nearly one-third of Y Combinator's startups will not be able to make payroll at some point in the next month if they cannot access their money.
Roku's company logo is seen in front of a large office building.
Internet TV provider Roku was among casualties of the bank's collapse. It said in a regulatory filing Friday that about 26 per cent of its cash — $487 million US — was deposited at Silicon Valley Bank. (Justin Sullivan/Getty Images)
Internet TV provider Roku was among casualties of the bank collapse. It said in a regulatory filing Friday that about 26 per cent of its cash — $487 million US — was deposited at Silicon Valley Bank.
Roku said its deposits with SVB were largely uninsured and it didn't know "to what extent" it would be able to recover them.
As part of the seizure, California bank regulators and the FDIC transferred the bank's assets to a newly created institution — the Deposit Insurance Bank of Santa Clara. The new bank will start paying out insured deposits on Monday. Then the FDIC and California regulators plan to sell off the rest of the assets to make other depositors whole.
Failure unfolded rapidly
There was unease in the banking sector all week, with shares tumbling by double digits. Then news of Silicon Valley Bank's distress pushed shares of almost all financial institutions even lower Friday
The failure arrived with incredible speed. Some industry analysts suggested Friday that the bank was still a good company and a wise investment. Meanwhile, Silicon Valley Bank executives were trying to raise capital and find additional investors. However, trading in the bank's shares was halted before stock market's opening bell due to extreme volatility.
A man checks his phone while standing outside an office building.
An employee checks his phone after arriving to work on Friday to SVB's shuttered headquarters. (Justin Sullivan/Getty Images)
Shortly before noon, the FDIC moved to shutter the bank. Notably, the agency did not wait until the close of business, which is the typical approach. The FDIC could not immediately find a buyer for the bank's assets, signaling how fast depositors cashed out.
The White House said U.S. Treasury Secretary Janet Yellen was "watching closely." The administration sought to reassure the public that the banking system is much healthier than during the Great Recession.
"Our banking system is in a fundamentally different place than it was, you know, a decade ago," said Cecilia Rouse, chair of the White House Council of Economic Advisers.
"The reforms that were put in place back then really provide the kind of resilience that we'd like to see."
Two men stand outside the closed doors of a bank. Two other men stand inside.
People try to access the Park Avenue location of SVB, in New York City, on Friday. (David 'Dee' Delgado/Reuters)
In 2007, the biggest financial crisis since the Great Depression rippled across the globe after mortgage-backed securities tied to ill-advised housing loans collapsed in value. The panic on Wall Street led to the demise of Lehman Brothers, a firm founded in 1847.
Because major banks had extensive exposure to one another, the crisis led to a cascading breakdown in the global financial system, putting millions out of work.
At the time of its failure, Silicon Valley Bank, which is based in Santa Clara, Calif., had $209 billion US in total assets, the FDIC said.
It was unclear how many of its deposits were above the $250,000 insurance limit, but previous regulatory reports showed that lots of accounts exceeded that amount.
2.
U.S. government will not bail out Silicon Valley Bank, Yellen says
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American banking system 'resilient,' Yellen says, amid fears some workers will not receive paycheques
The Associated Press · Posted: Mar 12, 2023 11:56 AM EDT | Last Updated: 1 hour ago
A man stands in front of a Silicon Valley Bank branch in New York City
A man stands near the sign of a Silicon Valley Bank (SVB) logo at the Park Avenue location, in New York City, U.S., March 10, 2023. (David 'Dee' Delgado/Reuters)
U.S. Treasury Secretary Janet Yellen said Sunday that the federal government would not bail out Silicon Valley Bank, but is working to help depositors who are concerned about their money.
The Federal Deposit Insurance Corporation insures deposits up to $250,000, but many of the companies and wealthy people who used the bank — known for its relationships with technology startups and venture capital — had more than that amount in their accounts. There are fears that some workers across the country won't receive their paycheques.
Yellen, in an interview with CBS's Face the Nation, provided few details on the government's next steps. But she emphasized that the situation was much different from the financial crisis almost 15 years ago, which led to bank bailouts to protect the industry.
"We're not going to do that again," she said. "But we are concerned about depositors, and we're focused on trying to meet their needs."
Why the Silicon Valley Bank failure isn't looking like a repeat of 2008
With Wall Street rattled, Yellen tried to reassure Americans that there will be no domino effect after the collapse of Silicon Valley Bank.
American banking system 'really safe,' Yellen says
"The American banking system is really safe and well capitalized," she said. "It's resilient."
Silicon Valley Bank is the nation's 16th-largest bank. It was the second biggest bank failure in U.S. history after the collapse of Washington Mutual in 2008. The bank served mostly technology workers and venture capital-backed companies, including some of the industry's best-known brands.
A man stands outside a bank.
A customer stands outside of a shuttered Silicon Valley Bank (SVB) headquarters on Friday in Santa Clara, Calif. Silicon Valley Bank was shut down on Friday morning by California regulators and was put in control of the U.S. Federal Deposit Insurance Corp. (Justin Sullivan/Getty Images)
Silicon Valley Bank began its slide into insolvency when its customers, largely technology companies that needed cash as they struggled to get financing, started withdrawing their deposits. The bank had to sell bonds at a loss to cover the withdrawals, leading to the largest failure of a U.S. financial institution since the height of the financial crisis.
Yellen described rising interest rates, which have been increased by the Federal Reserve to combat inflation, as the core problem for Silicon Valley Bank. Many of its assets, such as bonds or mortgage-backed securities, lost market value as rates climbed.
"The problems with the tech sector aren't at the heart of the problems at this bank," she said.
Yellen said she expected regulators to consider "a wide range of available options," including the acquisition of Silicon Valley Bank by another institution. So far, however, no buyer has stepped forward.
Silicon Valley Bank collapse marks 2nd biggest bank failure in U.S. history
Tom Quaadman, executive vice-president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, said in a statement that "we urge the administration to facilitate a quick acquisition, guaranteeing all bank depositors have access to their cash."
Regulators seized the bank's assets on Friday. Deposits that are insured by the federal government are supposed to be available by Monday morning.
"I've been working all weekend with our banking regulators to design appropriate policies to address this situation," Yellen said. "I can't really provide further details at this time."
House Speaker Kevin McCarthy, a Republican from California, told Fox News Channel's Sunday Morning Futures that he hoped the administration would announce the next steps as soon as Sunday.
"They do have the tools to handle the current situation, they do know the seriousness of this and they are working to try to come forward with some announcement before the markets open," he said.
McCarthy also expressed hope that Silicon Valley Bank would be purchased.
"I think that would be the best outcome to move forward and cool the markets and let people understand that we can move forward in the right manner," he said.
Bank's collapse could prompt people to make other transfers
Sen. Mark Warner, a Democrat from Virginia, said in an interview with ABC News's This Week that he was concerned that the bank's collapse could prompt nervous people to transfer money from other regional banks to larger institutions.
"We don't want further consolidation," he said.
Warner suggested there would be a "moral hazard" in reimbursing depositors in excess of the $250,000 limit and said an acquisition would be the best next step.
"I'm more optimistic this morning than I was yesterday afternoon at this time," he said. "But, again, we will see how this plays out during the rest of the day."
He added: "What we've got to focus on right now is how do we make sure there's not contagion."
A view of the outside of a bank.
Vehicles are parked outside a Silicon Valley Bank branch in Wellesley, Mass., on Saturday. Regulators have seized its assets, marking the largest failure of a U.S. financial institution since the height of the financial crisis almost 15 years ago. (Peter Morgan/The Associated Press)
U.S. President Joe Biden and California Gov. Gavin Newsom spoke about "efforts to address the situation" on Saturday, although the White House did not provide additional details on next steps.
Newsom said the goal was to "stabilize the situation as quickly as possible, to protect jobs, people's livelihoods, and the entire innovation ecosystem that has served as a tent pole for our economy."
3.
Why the Silicon Valley Bank failure isn't looking like a repeat of 2008
SVB was brought down by the oldest issue in banking — a run on the bank
The Associated Press · Posted: Mar 11, 2023 5:32 PM EST | Last Updated: March 11
A man stands outside a bank.
A customer stands outside of the shuttered headquarters of Silicon Valley Bank on Friday in Santa Clara, Calif. The bank was shut down by regulators on Friday. (Justin Sullivan/Getty Images)
The financial institution best known for its relationships with high-flying tech startups and venture capital firms, Silicon Valley Bank, experienced one of the oldest problems in banking — a bank run — which led to its failure on Friday.
Its downfall is the largest failure of a financial institution in the United States since Washington Mutual collapsed at the height of the financial crisis more than a decade ago. And it had immediate effects.
Some startups that had ties to the bank scrambled to pay their workers, and feared they might have to pause projects or lay off employees until they could access their funds.
California Gov. Gavin Newsom said Saturday that he's talking with the White House to help "stabilize the situation as quickly as possible, to protect jobs, people's livelihoods, and the entire innovation ecosystem that has served as a tent pole for our economy."
How did this happen? Here's what to know about why the bank failed, who was affected most, and what to know about how it may, and may not affect, the wider banking system in the U.S.
Why it failed
Silicon Valley Bank was hit hard by the downturn in technology stocks over the past year as well as the U.S. Federal Reserve's aggressive plan to increase interest rates to combat inflation.
A view of the outside of a bank.
Vehicles are parked outside a Silicon Valley Bank branch in Wellesley, Mass., on Saturday. (Peter Morgan/The Associated Press)
The bank bought billions of dollars worth of bonds over the past couple of years, using customers' deposits as a typical bank would normally operate. These investments are typically safe, but the value of those investments fell because they paid lower interest rates than what a comparable bond would pay if issued in today's higher interest rate environment.
Typically that's not an issue, because banks hold onto those for a long time — unless they have to sell them in an emergency.
But Silicon Valley's customers were largely startups and other tech-centric companies that started needing cash more over the past year. Venture capital funding was drying up, companies were not able to get additional rounds of funding for unprofitable businesses, and therefore had to tap their existing funds — often deposited with Silicon Valley Bank, which sat in the centre of the tech startup universe.
Silicon Valley Bank collapse marks 2nd biggest bank failure in U.S. history
Alphabet — Google's corporate parent — to cut 12,000 jobs
So Silicon Valley customers started withdrawing their deposits. Initially that wasn't a huge issue, but the withdrawals started requiring the bank to start selling its own assets to meet customer withdrawal requests. Because Silicon Valley customers were largely businesses and the wealthy, they likely were more fearful of a bank failure since their deposits were over $250,000 US, which is the U.S. government-imposed limit on deposit insurance.
That required selling typically safe bonds at a loss, and those losses added up to the point that Silicon Valley Bank became effectively insolvent. The bank tried to raise additional capital through outside investors, but was unable to find them.
The fancy tech-focused bank was brought down by the oldest issue in banking — a run on the bank.
The main entrance to a bank in Menlo Park, Calif.
The entrance to a Silicon Valley Bank in Menlo Park, Calif., is seen on Friday. (Michaela Vatcheva/Reuters)
Bank regulators had to seize Silicon Valley Bank's assets to protect the assets and deposits remaining at the bank.
San Francisco-based employee performance management company Confirm.com was among the Silicon Valley Bank depositors that rushed to pull their money out before regulators seized the bank.
Co-founder David Murray credits an email from one of Confirm's venture capital investors, which urged the company to withdraw its funds "immediately," citing signs of a run on the bank.
Such actions accelerated the flight of cash, which led to the bank's collapse.
What happens next?
There are two large problems remaining with Silicon Valley Bank. Both could lead to further issues if not resolved quickly.
The most immediate problem is Silicon Valley Bank's large deposits. The U.S. government insures deposits to $250,000, but anything above that level is considered uninsured. The Federal Deposit Insurance Corporation said insured deposits would be available on Monday morning. However the vast majority of Silicon Valley Bank's deposits were uninsured, a unique characteristic of the bank due to its customers being largely startups and wealthy tech workers.
People standing outside of a bank.
People stand outside of an entrance to Silicon Valley Bank in Santa Clara, Calif., on Friday. (Jeff Chiu/The Associated Press)
At the moment, all of that money can't be accessed and likely will have to be released in an orderly process. But many businesses cannot wait weeks to access funds to meet payroll and office expenses.
Tara Fung, co-founder and CEO of tech startup Co:Create, said her firm uses multiple banks besides Silicon Valley Bank and was able switch over its payroll and vendor payments to another bank.
Her firm chose the bank as a partner because it is the "gold standard for tech firms and banking partnerships," and she was upset that some people seemed to be gloating about its failure.
A second key problem is there's no buyer of Silicon Valley Bank. Typically bank regulators look for a stronger bank to take on the assets of a failing bank, but in this case, another bank hasn't stepped forward.
A bank buying Silicon Valley Bank could go a long way to resolving some of the problems tied with the money that startups can't access right now.
Any sign of a repeat of 2008?
At the moment, no, and experts don't expect there to be any issues spreading to the broader banking sector.
Silicon Valley Bank was large but had a unique existence by servicing nearly exclusively the technology world and VC-backed companies. It did a lot of work with the particular part of the economy that was hit hard in the past year.
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Other banks are far more diversified across multiple industries, customer bases and geographies. The most recent round of "stress tests" by the Federal Reserve of the largest banks and financial institutions showed that all of them would survive a deep recession and a significant drop in unemployment.
However there might be economic ripple effects in the Bay Area and in the technology startup world if the remaining money can't be released quickly.
5.
Silicon Valley Bank share slump rocks financial stocks
Published
2 days ago
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Silicon Valley Bank signage
IMAGE SOURCE,GETTY IMAGES
By James Clayton, Peter Hoskins and Annabelle Liang
in San Francisco and Singapore
Shares in banks around the world have slid after troubles at one US bank triggered fears of a wider problem for the financial sector.
On Thursday, shares in Silicon Valley Bank (SVB), a key lender to technology start-ups, plunged after it announced plans to shore up its finances.
This had a knock-on effect, with the four largest US banks losing more than $50bn in market value.
Bank shares in Asia and Europe fell sharply on Friday.
Among the UK banks, HSBC shares fell 4.8% and Barclays dropped 3.8%.
SVB's shares saw their biggest one-day drop on record on Thursday as they plunged by more than 60% and lost another 20% in after-hours trade.
The slide came a day after the bank announced a $2.25bn (£1.9bn) share sale to boost its finances.
SVB launched the share sale after losing around $1.8bn when it offloaded a portfolio of assets, mainly US government bonds.
But more concerningly for the bank, some start-ups who have money deposited have been advised to withdraw funds.
Hannah Chelkowski, founder of Blank Ventures, a fund that invests in financial technology, told the BBC the situation was "wild". She is advising companies in her portfolio to withdraw funds.
"It's crazy how it's just unravelled like this. The interesting thing is that it's the most start-up friendly bank and supported start-ups so much through Covid. Now VCs are telling their portfolio companies to pull their funds," she said.
"It's brutal," she added.
A crucial lender for early-stage businesses, SVB is the banking partner for nearly half of US venture-backed technology and healthcare companies that listed on stock markets last year.
SVB did not immediately respond to a BBC request for further comment.
In the wider market, there were concerns about the value of bonds held by banks as rising interest rates made those bonds less valuable.
Central banks around the world - including the US Federal Reserve and the Bank of England - have sharply increased interest rates as they try to curb inflation.
Banks tend to hold large portfolios of bonds and as a result are sitting on significant potential losses. The falls in the value of bonds held by banks is not necessarily a problem unless they are forced to sell them.
But, if like Silicon Valley Bank, lenders have to sell the bonds they hold at a loss it could have an impact on their profits.
"The banks are casualties of the hike in interest rates," Ray Wang, founder and chief executive of Silicon Valley-based consultancy Constellation Research told the BBC.
"Nobody at Silicon Valley Bank and in a lot of places thought that these interest rate hikes would have lasted this long. And I think that's really what happened. They bet wrong," he added.
Russ Mould, investment director at AJ Bell, said the ripple effect of the problems at SVB showed these sorts of events "often hint at vulnerabilities in the wider system".
"The fact SVB's share placing has been accompanied by a fire sale of its bond portfolio raises concerns.
"Lots of banks hold large portfolios of bonds and rising interest rates make these less valuable - the SVB situation is a reminder that many institutions are sitting on large unrealised losses on their fixed-income [bond] holdings."
Silicon Valley Bank: Regulators take over as failure raises fears
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1 day ago
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A worker (C) tells people that the Silicon Valley Bank (SVB) headquarters is closed on March 10, 2023 in Santa Clara, California.
IMAGE SOURCE,GETTY IMAGES
Image caption,
Silicon Valley Bank (SVB) offices were shut as customers sought their funds
By Natalie Sherman & James Clayton
BBC News
US regulators have shut down Silicon Valley Bank (SVB) and taken control of its customer deposits in the largest failure of a US bank since 2008.
The moves came as the firm, a key tech lender, was scrambling to raise money to plug a loss from the sale of assets affected by higher interest rates.
Its troubles prompted a rush of customer withdrawals and sparked fears about the state of the banking sector.
Officials said they acted to "protect insured depositors".
Silicon Valley Bank faced "inadequate liquidity and insolvency", banking regulators in California, where the firm has its headquarters, said as they announced the takeover.
The Federal Deposit Insurance Corporation (FDIC), which typically protects deposits up to $250,000, said it had taken charge of the roughly $175bn (£145bn) in deposits held at the bank, the 16th largest in the US.
Bank offices would reopen and clients with insured deposits would have access to funds "no later than Monday morning", it said, adding that money raised from selling the bank's assets would go to uninsured depositors.
Investor flight
With many of the firm's customers in that position, the situation has left many companies with money tied up at the bank worried about their future.
"I'm on my way to the branch to find my money right now. Tried to transfer it out yesterday didn't work. You know those moments where you might be really screwed but you're not sure? This is one of those moments," one start-up founder told the BBC.
A worker (C) tells people that the Silicon Valley Bank (SVB) headquarters is closed on March 10, 2023 in Santa Clara, California.
IMAGE SOURCE,GETTY IMAGES
Image caption,
Silicon Valley Bank (SVB) offices were shut as customers sought their funds
Another founder of a healthcare start-up said: "Literally three days ago, we just hit a million dollars in our bank account... And then this happens."
He managed to get the money wired to a different account 40 minutes before the deadline. "It was pending. And then this morning, it was there. But I know other people who did the same thing minutes after me, and it's not transferred."
"It was a crazy situation," he said.
Regulator response
The collapse came after SVB said it was trying to raise $2.25bn (£1.9bn) to plug a loss caused by the sale of assets, mainly US government bonds, which had been affected by higher interest rates.
The news caused investors and customers to flee the bank. Shares saw their biggest one-day drop on record on Thursday, plunging more than 60% and fell further in after-hours sales before trading was halted.
Concerns that other banks could face similar problems led to widespread selling of bank shares globally on Thursday and early Friday.
Financial shares hit by Silicon Valley Bank slump
Speaking in Washington on Friday, US Treasury Secretary Janet Yellen said she was monitoring "recent developments" at Silicon Valley Bank and others "very carefully".
She later met with top banking regulators, where the Treasury Department said she expressed "full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient".
Janet Yellen
IMAGE SOURCE,GETTY IMAGES
Image caption,
Janet Yellen expressed confidence in the resilience of the banking sector
SVB did not respond to a request for comment.
A crucial lender for early-stage businesses, the company is the banking partner for nearly half of US venture-backed technology and healthcare companies that listed on stock markets last year.
The firm, which started as a California bank in 1983, expanded rapidly over the last decade. It now employs more than 8,500 people globally, though most of its operations are in the US.
But the bank has been under pressure, as higher rates make it harder for start-ups to raise money through private fundraising or share sales, and more clients withdrew deposits, moves that snowballed this week.
In Silicon Valley the reverberations from the collapse were widespread as companies faced questions about what the collapse meant for their finances.
Even businesses without direct business were affected, like customers of Rippling, a firm that handles payrolls software and had used SVB. It warned that current payments may face delays and said it was switching its business to another bank.
SVB's UK subsidiary said it will be put into insolvency from Sunday evening.
The Bank of England said Silicon Valley Bank UK would stop making payments or accepting deposits in the interim and the move would allow individual depositors to be paid up to £85,000 from the UK's deposit insurance scheme.
"SVBUK has a limited presence in the UK and no critical functions supporting the financial system," the BoE added.
Silicon Valley Bank catered to the tech industry
IMAGE SOURCE,GETTY IMAGES
Image caption,
Silicon Valley Bank, led by chief Gregory Becker, catered to the tech industry and expanded rapidly over the last decade
As well as being a major blow to the tech industry, the collapse of SVB has raised concerns about the wider risks facing banks, as rapid increases in interest rates hit bond markets.
Central banks around the world - including the US Federal Reserve and the Bank of England - have sharply raised borrowing costs over the last year as they try to curb inflation.
But as rates rise, the value of existing bond portfolios typically declines.
Those falls mean many banks are sitting on significant potential losses - though the change in value would not typically be a problem unless other pressures force the firms to sell the holdings.
Shares in some major US banks recovered on Friday, but the sell-off continued to hit smaller firms, forcing trading halts of names such as Signature Bank and others.
The tech-heavy Nasdaq ended the day down 1.7%, while the S&P 500 dropped 1.4% and the Dow closed 1% lower.
Major European and Asian indexes also closed lower, with the FTSE 100 down 1.6%.
Alexander Yokum, equity research analyst at CFRA, said banks that specialise in single industries are seen as vulnerable to rapid withdrawals, like the one that hit SVB.
"Silicon Valley Bank would not have lost money if they hadn't run out of cash to give back to their customers," he said. "The issue was that people wanted money and they didn't have it - they had it invested and those investments were down."
"I know there's a lot of fear, but it's definitely company-specific," he said.
"The average Joe should be fine," he added, but he said tech firms would likely find it even harder to raise money. "It's not good," he said.
Silicon Valley Bank chief pressed Congress to weaken risk regulations
CEO Greg Becker personally led the bank’s half-million-dollar push to reduce scrutiny of his institution – and lawmakers obliged
Rebecca Burns, David Sirota, Julia Rock & Andrew Perez of the Lever
Sat 11 Mar 2023 13.50 GMT
This story was first published in the Lever
Eight years before the second-largest bank failure in American history occurred this week, the bank’s president personally pressed Congress to reduce scrutiny of his financial institution, citing the “low risk profile of our activities and business model”, according to federal records reviewed by the Lever.
SVB logo through rain
Why did Silicon Valley Bank fail?
Three years later – after the bank spent more than half a million dollars on federal lobbying – lawmakers obliged.
On Friday, California regulators shut down the Silicon Valley Bank (SVB), a top lender to venture capital firms and tech startups, and the Federal Deposit Insurance Corporation took it over, following a bank run by its customers. The bank reportedly did not have a chief risk officer in the months leading up to the collapse, while more than 90% of its deposits were not insured.
In 2015, SVB President Greg Becker submitted a statement to a Senate panel pushing legislators to exempt more banks – including his own – from new regulations passed in the wake of the 2008 financial crisis. Despite warnings from some senators, Becker’s lobbying effort was ultimately successful.
Touting “SVB’s deep understanding of the markets it serves, our strong risk management practices”, Becker argued that his bank would soon reach $50bn in assets, which under the law would trigger “enhanced prudential standards”, including more stringent regulations, stress tests and capital requirements for his and other similarly sized banks.
Becker insisted that $250bn was a more appropriate threshold.
“Without such changes, SVB likely will need to divert significant resources from providing financing to job-creating companies in the innovation economy to complying with enhanced prudential standards and other requirements,” said Becker, who reportedly sold $3.6m of his own stock two weeks ago, in the lead-up to the bank’s collapse. “Given the low risk profile of our activities and business model, such a result would stifle our ability to provide credit to our clients without any meaningful corresponding reduction in risk.”
Two months later, SVB added the former Obama treasury department official Mary Miller to its board, noting she had previously helped oversee “financial regulatory reforms”.
Silicon Valley Bank logo
Silicon Valley Bank fails in largest bank collapse since 2008 crisis
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Around that time, federal disclosure records show the bank was lobbying lawmakers on “financial regulatory reform” and the Systemic Risk Designation Improvement Act of 2015 – a bill that was the precursor to legislation ultimately signed by President Donald Trump that increased the regulatory threshold for stronger stress tests to $250bn.
Trump signed the bill despite a report from Democrats on Congress’s joint economic committee warning that under the new law, SVB and other banks of its size “would no longer be subject to nearly any enhanced regulations”.
The bill was supported in the Senate by 50 Republicans and 17 Democrats, including the Democratic Virginia Senator Mark Warner, for whom Becker held a fundraiser at his Menlo Park, California, home in 2016, according to an invitation obtained by the Sunlight Foundation and OpenSecrets. The bank’s political action committee also donated a total of $10,000 to Warner’s campaigns in the 2016 and 2018 election cycles.
In 2019, when the Federal Reserve proposed regulations implementing the deregulatory law, financial watchdogs warned that its regulations on Category IV institutions – as SVB was later classified due to its size and other risk factors – were far too weak.
“The proposal to significantly weaken enhanced prudential standards for Category IV firms could be disastrous,” Better Markets, a non-profit advocating for stricter financial regulations, wrote in a comment on the Federal Reserve’s proposal. “Moreover, these are not small or insignificant firms. Recall that the smallest among this class of banks is over twice the size of the $50bn banks that automatically required enhanced prudential regulation under the Dodd-Frank Act as originally enacted.”
The final rule guaranteed that Category IV institutions are “not required to conduct and publicly report the results of a company-run stress test” and “reduces the required minimum frequency of liquidity stress tests and granularity of certain liquidity risk-management requirements”, according to Federal Reserve officials at the time.
In 2021, SVB passed the threshold of $100bn under management, triggering some additional scrutiny as a Category IV bank but remaining exempt from the more frequent and detailed analyses that regulators perform to determine whether banks above $250bn of assets have sufficient capital to withstand a crisis.
A press release on Friday from the Federal Deposit Insurance Corporation noted that as of December 2022, SVB had $209bn in assets under management – keeping it below the $250bn threshold for which the bank had lobbied.
SVB is the biggest bank to collapse since Washington Mutual failed in 2008 during the financial crisis, and the second-biggest bank failure in US history.
Before Becker’s 2015 push, SVB had pressed Federal Reserve officials to limit regulatory scrutiny of mid-sized banks, arguing that “we are very concerned that the regulatory requirements for covered companies will end up trickling down to smaller financial institutions”.
In 2019, Becker was elected to serve on the board of directors at the Federal Reserve Bank of San Francisco. Becker left the board on Friday.
This story was updated on 11 March 2023 to correct that Becker delivered his statement in person to the Senate committee. His statement was actually written and submitted to the committee.
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March 10, 20234:39 PM
Explainer: What caused Silicon Valley Bank's failure?
Reuters
NEW YORK, March 10 (Reuters) - SVB Financial Group Inc's (SIVB.O) shutdown and takeover by banking regulators on Friday can be traced to the U.S. Federal Reserve raising interest rates and souring the risk appetite of investors.
Here is the sequence of events that led to Silicon Valley Bank's failure:
FEDERAL RESERVE RAISES RATES
미 연방준비제도 (FRB)가 인플레이션을 잡기 위해 이자율을 올림.
고이자율 때문에 투자자의 자금줄이 막히고, 기술 스타트업 회사의 재정난 초래. 실리콘밸리 은행의 주요 고객인 기술 스타트업의 자금난 발생.
The Federal Reserve has been raising interest rates from their record-low levels since last year in its bid to fight inflation. Investors have less appetite for risk when the money available to them becomes expensive due to the higher rates. This weighed on technology startups - the primary clients of Silicon Valley Bank - because it made their investors more risk-averse.
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SOME SILICON VALLEY BANK CLIENTS FACE CASH CRUNCH
As higher interest rates caused the market for initial public offerings to shut down for many startups and made private fundraising more costly, some Silicon Valley Bank clients started pulling money out to meet their liquidity needs. This culminated in Silicon Valley Bank looking for ways this week to meet its customers' withdrawals.
Banking regulators close Silicon Valley Bank
A man puts a sign on the door of the Silicon Valley Bank as an onlooker watches at the bank’s headquarters in Santa Clara, California, U.S. March 10, 2023. REUTERS/Nathan Frandino
SILICON VALLEY BANK SELLS BOND PORTFOLIO AT A LOSS
To fund the redemptions, Silicon Valley Bank sold on Wednesday a $21 billion bond portfolio consisting mostly of U.S. Treasuries. The portfolio was yielding it an average 1.79%, far below the current 10-year Treasury yield of around 3.9%. This forced SVB to recognize a $1.8 billion loss, which it needed to fill through a capital raise.
SVB ANNOUNCES STOCK SALE
SVB announced on Thursday it would sell $2.25 billion in common equity and preferred convertible stock to fill its funding hole. Its shares ended trading on the day down 60%, as investors fretted that the deposit withdrawals may push it to raise even more capital.
STOCK SALE COLLAPSES
Some SVB clients pulled their money from the bank on the advice of venture capital firms such as Peter Thiel's Future Fund, Reuters reported. This spooked investors such as General Atlantic that SVB had lined up for the stock sale, and the capital raising effort collapsed late on Thursday.
SVB GOES INTO RECEIVERSHIP
SVB scrambled on Friday to find alternative funding, including through a sale of the company. Later in the day, however, the Federal Deposit Insurance Corporation (FDIC) then announced that SVB was shut down and placed under its receivership. The FDIC added that it would seek to sell SVB's assets and that future dividend payments may be made to uninsured depositors.
