Silicon Valley Bank assets seized as depositors pull cash
The US rushed to seize the assets of Silicon Valley Bank on Friday after a run on the bank, the largest failure of a financial institution since Washington Mutual during the height of the financial crisis more than a decade ago.
Silicon Valley, the nation’s 16th largest, failed after depositors – mostly technology workers and venture capital-backed companies – began withdrawing their money as anxiety about the bank’s situation spread this week.
Silicon Valley was heavily exposed to tech industry and there is little chance of contagion in the banking sector similar to the chaos in the months leading up to the Great Recession more than a decade ago.
In 2007, the biggest financial crisis since the Great Depression rippled across the globe after mortgage-backed securities tied to ill-advised housing loans rippled from the US to Asia and Europe.
1/1 The FDIC today created the Deposit Insurance National Bank of Santa Clara to protect insured depositors of Silicon Valley Bank, which was closed this morning by state bank regulators in California. 🧵https://t.co/87KpYGKymy
— FDIC (@FDICgov) March 10, 2023
The panic on Wall Street led to the collapse of the storied Lehman Brothers, founded in 1847. Because major banks had major exposure to one another, it created a cascading disruption of the global financial system.
Major banks have sufficient capital to avoid a similar situation, though the sector has been under pressure all week.
Silicon Valley’s failure came with incredible speed, with some industry analysts on Friday suggesting it was a good company and still likely a wise investment.
Silicon Valley executives were looking to raise capital early on Friday or find additional investors in the company. But trading in its shares had been halted before the opening bell due to extreme volatility.
Shortly before noon eastern time, the Federal Deposit Insurance Corporation (FDIC) announced it was shuttering 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 bank’s deposits will now be locked up in receivership.
The bank had 209 billion US dollars (£173 billion) in assets and 175.4 billion dollars in deposits at the time of failure, the FDIC said in a statement.
It was unclear how much of deposits was above the 250,000 dollar (£207,000) insurance limit at the moment, but previous regulatory reports showed that much of Silicon Valley Bank’s deposits were above that limit.
The FDIC said deposits below the 250,000 dollar limit would be available Monday morning.
Silicon Valley Bank on Thursday announced plans to raise up to 1.75 billion dollars (£1.45 billion) in order to strengthen its capital position amid concerns about higher interest rates and the economy.
Shares of SVB Financial Group plunged 60% on Thursday, and rocketed lower again on Friday before the open of the Nasdaq where it is traded.
Silicon Valley is not small. It acts as a major financial conduit for venture capital-backed companies, which have been hit hard in the past 18 months as the US Federal Reserve has raised interest rates and made riskier tech assets less attractive to investors.
Venture capital-backed companies were reportedly being advised to pull at least two months’ worth of “burn” cash out of Silicon Valley Bank to cover their expenses.
Typically VC-backed companies are not profitable and how quickly they use the cash they need to run their businesses — their so-called “burn rate” — is a typically important metric for investors.
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