Silicon Valley Bank was shut down by California regulators on Friday and US Federal Deposit Insurance Corporation (FDIC) took over the failed bank, marking the biggest bank failure since 2008 in the United States.
The stunning development came barely a day after SVB Financial Group’s shares tanked more than 60 percent after a hurried bid to raise capital failed. SVB’s stock sell-off was triggered by the bank’s move to launch a $1.75 billion share sale on Wednesday to shore up its balance sheet. Investors were spooked by the state of the bank’s capital adequacy, resulting in a stock collapse that took it to the lowest level since 2016.
Panic and Aftermath
The problems started earlier in the week when SVB revealed that it had sold securities at a loss and that it was selling $2.25 billion worth of shares to improve the balance sheet. This created a panic on the markets and companies that had deposited large sums in the bank queued up for withdrawals.
“SVB’s condition deteriorated so quickly that it couldn’t last just five more hours …. That’s because its depositors were withdrawing their money so fast that the bank was insolvent, and an intraday closure was unavoidable due to a classic bank run,” Better Markets CEO Dennis M. Kelleher wrote, according to CNN.
16th Biggest US Bank
The tech-focused bank was ranked as the 16th biggest lender in the US at the end of 2022 and had more than $210 billion in assets. Even as billions of dollars of investor money is in limbo following the spectacular failure, the FDIC will now take over as the receiver who will manage the assets and liabilities.
Branches Will Open on March 13
FDIC said the main office and all branches of SVB will reopen on March 13. The regulator said all insured depositors will be able to access their deposits. However, according to the FDIC’s own calculation, nearly 90 percent of the Silicon Valley Bank’s $175 billion in deposits are uninsured, raising questions if the large number of investors will ever get their money back at all.
The collapse of SVB came hours after the bank claimed it was well capitalized and its CEO Gregory Becker personally called clients to reassure that their investment in the Silicon Valley bank was safe. “While VC (venture capital) deployment has tracked our expectations, client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted,” Becker had said.
FDIC Pushing for Merger With Another Bank
According to Reuters, the FDIC is attempting to find another bank that would merge with SVB to manage the crisis. According to FDIC, the crisis can be stemmed if it can seal a merger deal by Monday. If such a deal emerges, the unsecured deposits can be safeguarded. FDIC is an independent federal agency that insures bank deposits and oversees financial institutions.
