A person from inside Silicon Valley Bank, middle rear, talks to people waiting outside the headquarters of Silicon Valley Bank. Photo / AP
A person from inside Silicon Valley Bank, middle rear, talks to people waiting outside the headquarters of Silicon Valley Bank. Photo / AP
One of the largest banks in the US has spectacularly collapsed after it faced a bank run with customers scrambling to withdraw their cash.
Silicon Valley Bank (SVB), based near San Jose, closed its doors on Friday local time after the California state government and US federal government stepped in after fears it woes could spread to the rest of the banking sector.
It’s the biggest bank failure in the US since 2008 when Washington Mutual collapsed in the middle of the global financial crisis.
The New York Post reported that on Friday 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.
SVB Financial Groupk shares collapsed by 60 per cent. Image / CNBC
SVB is the 16th-largest bank in the US with a market capitalisation of around $40 billion, making it only around a fifth smaller than Australia’s ANZ Bank. It had total assets of more than $300 billion.
The company, which specialises in providing financial services to the tech sector including big names like Pinterest and Shopify, has spent more than 48 hours in crisis mode after it tried to cover plummeting customer deposits.
Its shares were down 60 per cent in pre-market trading Friday, prompting regulators to step in.
The California Department of Financial Protection and Innovation (DFPI) closed SVB and appointed the Federal Deposit Insurance Corporation as receiver of the funds, the FDIC said on Friday.
The move will protect customers with up to US$250,000 ($407,800) in deposits and buy time to find a potential buyer for the embattled Silicon Valley lender.
A sign posted at the entrance to Silicon Valley Bank's headquarters. Photo / AP
The DFPI “has taken possession of Silicon Valley Bank, citing inadequate liquidity and insolvency”, the California agency said.
SVB’s 17 branches will physically reopen on Monday under the control of the Deposit Insurance National Bank of Santa Clara (DINB), a new entity set up by the FDIC.
“DINB will maintain Silicon Valley Bank’s normal business hours,” the FDIC said.
“Banking activities will resume no later than Monday, March 13, including online banking and other services.”
SVB is the first federally insured institution to fail since 2020, the FDIC said.
The SVB crisis sparked a sell-off in European bank shares and volatility in US bank shares.
Investors fear that other banks could face similar losses amid financial fallout from rising interest rates, with central banks moving aggressively to tame decades-high inflation.
Present in the United States, Europe, Asia and Israel, SVB offered a range of financial services to start-ups, from simple bank accounts to advisory services on how to attract investments, as well as private banking and wealth management.
SVB boasted on its website, which was still up on Friday, that around half of all US venture capital-backed tech and life sciences companies were its clients.
The parent company of the commercial bank, SVB Financial Group, had announced on Wednesday that it would try to raise $2.4 billion in fresh funds through a share offering, after having sold off $21b in securities at a loss of $1.8b.
The bank was trying to raise funds to confront a surge in withdrawals by clients.
According to sources to financial magazine Bloomberg, investment funds were advising their clients to withdraw their funds from SVB, worsening the situation for the bank.
SVB chief executive Greg Becker sought to reassure customers about the bank’s financial health on Thursday, The Wall Street Journal reported, citing people familiar with the matter.
The newspaper said Becker urged them against pulling their deposits from the bank and to not spread fear or panic about its situation.
Silicon Valley Bank. Photo / AP
SVB’s focus on the tech industry made it vulnerable to the deteriorating conditions for the sector: the sharp increase in interest rates and a weakening risk appetite among investors plus continued supply chain problems.
After more than a decade of relentless growth, the stock market capitalisation of tech companies tumbled last year and they announced tens of thousands of layoffs.
Banks have also been impacted by the increase in interest rates. While higher interest rates are generally good for banks as they can earn more from lending, a lot depends on the rate they have to pay to acquire funds.
Short-term interest rates are currently higher than long-term interest rates in the United States, squeezing weaker banks and complicating investments.
The misfortune of one bank can affect the confidence of investors in the entire sector, although there is little chance of chaos spreading in the broader banking sector like in the months leading up to the Great Recession more than a decade ago. The biggest banks — those most likely to cause a widespread economic meltdown — have healthy balance sheets and plenty of capital.
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, it led to cascading breakdown in the global financial system, putting millions out of work.
There has been unease in the banking sector all week and the news of Silicon Valley Bank’s distress pushed shares of almost all financial institutions lower Friday, shares that had already tumbled by double digits since Monday.
SVB shows that bank runs, the self-fulfilling panic by depositors to withdraw their cash in the fear that a bank will collapse, remain very much a threat in today’s world despite bank regulation.
For analyst Christian Parisot, “the question now is which other banks could be under pressure” because of the squeeze on interest rates, he said in a note for the brokerage Aurel BGC.
He added that “the banking risk remains limited to very small banks and a limited number” of 10 or so US regional banks.
The White House said that Treasury Secretary Janet Yellen is “watching closely.” The White House sought to reassure people that the banking system is much healthier than it was in 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.”
