US regulators shutter Silicon Valley Bank and take control of its deposits, in what amounts to biggest retail banking failure since 2008 global financial crisis.
Regulators have rushed to seize the assets of one of Silicon Valley's top banks, marking the largest failure of a US financial institution since the height of the financial crisis almost 15 years ago.
Silicon Valley Bank, the nation's 16th-largest bank, failed after depositors hurried to withdraw money this week amid anxiety over the bank's health. It was the second biggest bank failure in US 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?'"
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.
Greg Becker, the chief executive officer of the bank, sent a video message to employees acknowledging the "incredibly difficult" 48 hours leading up to its collapse.
"It's with an incredibly heavy heart that I'm here to deliver this message," he said in the video seen by the Reuters news agency.
While the Federal Deposit Insurance Corporation [FDIC] has taken control of the lender, Becker said he is working with banking regulators to find a partner for the bank.
There is "no guarantee" that a deal will be struck, he said.
"There could be a bloodbath next week as banks are in trouble, the short sellers are out there and they are going to attack every single bank, especially the smaller ones," said Christopher Whalen, chairman of Whalen Global Advisors.
READ MORE: Here's why Silicon Valley Bank collapse won't lead to another 2008
WATCH 🚨 Video footage reportedly show customers queuing up outside Silicon Valley Bank in Menlo Park, California amid SVB collapse— Insider Paper (@TheInsiderPaper) March 11, 2023
White House 'watching closely'
Silicon Valley Bank’s failure arrived with incredible speed, with some industry analysts on Friday suggesting it was a good company and still likely a wise investment.
Silicon Valley Bank executives were trying to raise capital early on Friday and find additional investors.
However, trading in the bank's shares was halted before stock market's the opening bell due to extreme volatility. Shortly before noon eastern, FDIC 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, signalling how fast depositors had cashed out.
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."
Silicon Valley Bank had $209 billion 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, but previous regulatory reports showed that much of Silicon Valley Bank's deposits exceeded that limit. The FDIC that deposits below the $250,000 limit would be available on Monday morning.
Interest rate rising, bonds' value dropping
The bank still appeared stable this year, but on Thursday it announced plans to raise up to $1.75 billion in order to strengthen its capital position. That sent investors scurrying and shares plunged 60 percent. They rocketed lower again on Friday before the open of the Nasdaq, where it is traded.
Bill Tyler, the CEO of TWG Supply in Grapevine, Texas, said he first realised something was wrong when his employees were texting him at 6:30 am on Friday that they didn't receive their paychecks.
TWG, which has just 18 employees, had already sent the money for its paychecks to a payroll services provider, Rippling PEO, which had used Silicon Valley Bank.
"We’re waiting on roughly $27,000," he said. "It’s already not a timely payment. It’s already an uncomfortable position. I don’t want to ask any employees, to say, ‘Hey, can you wait until mid-next week to get paid?’”
Rippling's CEO, Parker Conrad, tweeted that the company will process payrolls through JPMorgan Chase. But today's payments out of Silicon Valley Bank, he added, "have not been processed" and the FDIC's involvement made him skeptical of assurances he was getting from the bank.
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.
At the same time, the bank was hit hard by the Federal Reserve's fight against inflation and an aggressive series of interest rate hikes to cool the economy.
As the Fed raises its benchmark interest rate, the value of bonds, typically a stable asset, start to fall. That is not typically a problem but when depositors grow anxious and begin withdrawing their money, banks sometimes have to sell those bonds before they mature to cover that exodus.
That is exactly what happened to Silicon Valley Bank, which had to sell $21 billion in highly liquid assets to cover the exodus of deposits. It took a $1.8 billion loss on that sale.