United States regulators shut down Silicon Valley Bank on Friday, marking the biggest bank failure since the 2008 recession. It sent a shockwaves across the tech world.
The closure was triggered by a bank run that began after the bank announced that it lost $1.8 billion in the sale of treasuries and securities. Without clear communication, many customers took those losses as a sign to take their money out of the bank.
How did it happen?
The Silicon Valley Bank, flush with cash, had bought huge amounts of bonds more than a year ago. Like other banks, it kept a small amount of the deposits on hand and invested the rest with the hope of earning a return.
However, it didn’t last long as the Federal Reserve kept on raising interest rates to taper down inflation since last year. And at the same time, a start-up funding freeze put pressure on the bank’s clients, who then began to withdraw their money.
To pay those requests, SVB was forced to sell off some of its investments at a time when their value had declined. In its surprise disclosure on Wednesday, the bank said it had lost nearly $2 billion.
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What else went wrong?
Apart from that, SVB’s deposit inflows became as outflows as its clients burned cash and stopped getting new funds from public offerings or fundraisings. Getting new deposits also became far more expensive, as the deposit rates were rising with the US Fed’s hikes. As a result, deposits fell from nearly $200 billion at the end of March 2022 to $173 billion at year-end 2022.
The deposits fell further this year. As of January 19, SVB was forecasting its deposits would decline by a mid-single-digit percentage in 2023. But its expectation as of March 8 was for a low-double-digit percentage decline.
The tipping point
SVB on Wednesday said that it had sold a large chunk of its securities worth $21 billion at the time of sale, at a loss of about $1.8 billion after tax.
It wanted to reset its interest earnings at today’s higher yields, and provide it with the balance-sheet flexibility to meet potential outflows and still fund new lending. It was also seeking to raise about $2.25 billion in capital.
Why didn’t it work?
But the announcement triggered panic in the stock markets. The share-sale announcement led the stock price to fall, making it harder to raise capital and leading the bank to scuttle its share-sale plans, the Wall Street Journal reported. Moreover, venture-capital firms reportedly began advising their portfolio companies to withdraw deposits from SVB.
According to the newspaper, the customers on Thursday attempted to withdraw $42 billion of deposits—about a quarter of the bank’s total—according to a filing by California regulators. As a result, it ran out of cash.
What will happen next?
The FDIC typically sells a failed bank’s assets to other banks, using the proceeds to repay depositors whose funds weren’t insured.
The offices of Silicon Valley Bank will reopen on Monday March 13 and all insured depositors will have full access to their insured deposits no later than Monday morning, the FDIC said.
However, 89 per cent of the bank’s $175 billion in deposits were uninsured as of 2022-end, FDIC said.
The US regulator hasn’t yet determined the current amount of uninsured deposits, but it said that the uninsured depositors will get an advance dividend within the next week.
For the remaining amounts of uninsured funds, the depositors will get something called a “receivership certificate,” and as the FDIC sells off the assets of SVB, they may get future dividend payments.
According to Reuters, citing people familiar with the developement, the FDIC is finding another bank over the weekend that is willing to merge with Silicon Valley Bank.
But even as FDIC hopes to stitch together a merger by Monday to safeguard unsecured deposits, no deal is certain, Reuters reported.
Biggest US bank to fail since 2008
The Silicon Valley Bank saga marks the second-biggest US commercial bank failure since Washington Mutual, which collapsed at the peak of the 2008 financial crisis.
Washington Mutual was the largest savings and loan association bank in the US before it went bust.
The failure of Washington Mutual, along with other major investment banks such as Lehman Brothers and Bear Stearns, led to a systemwide banking crisis, and many other small and mid-sized regional banks failed as a result.
Contagion fears subside
Despite initial panic on Wall Street, analysts said SVB’s collapse is unlikely to set off the kind of domino effect that gripped the banking industry during the financial crisis.
“The system is as well-capitalized and liquid as it has ever been,” Moody’s chief economist Mark Zandi said. “The banks that are now in trouble are much too small to be a meaningful threat to the broader system.”