Breaking News: Regulators close Silicon Valley Bank in largest failure since financial crisis
Silicon Valley Bank has been closed by the FDIC after the bank failed to raise fresh capital and stem deposit outflows that sent the institution into crisis this week.
Regulators closed troubled Silicon Valley Bank after deposit outflows, and a failed capital raise plunged the country's 16th largest bank into crisis, roiling the larger lending industry.
It became the largest bank to fail since Seattle's Washington Mutual during the height of the 2008 financial crisis and, behind Washington Mutual, the second-largest bank failure in U.S. history. It is also the first bank to fail since 2020. Treasury Secretary Janet Yellen acknowledged the industry turmoil Friday, saying there are "a few" banks the department is closely watching.
"There are recent developments that concern a few banks that I'm monitoring very carefully and when banks experience financial loss it is and should be a matter of concern," Yellen told lawmakers Friday.
Silicon Valley Bank's end came Friday when California state regulators seized the Santa Clara institution and appointed the Federal Deposit Insurance Corporation as the receiver, meaning the FDIC could sell off assets and return money to insured depositors.
The bank had $209 billion in assets and $175.4 billion in deposits. The FDIC, which serves as a backstop for deposits at U.S. banks up to a limit of $250,000, said all insured depositors would have access to their funds "no later" than Monday morning.
According to its annual report, roughly 87% of Silicon Valley Bank's deposits were uninsured as of December 2022. The FDIC said that uninsured depositors would receive an advance dividend within the next week and a receivership certificate for the remaining uninsured funds. It could make future dividend payments by selling Silicon Valley Bank's assets.
Shares of the bank's parent company, SVB Financial (SIVB), were halted for trading after losing 60% on Thursday and another 60% in pre-market trading on Friday. SVB is now seeking a buyer and hopes to complete a deal by Monday, according to a Bloomberg report.
Bank concerns fester
Concerns about the banking industry spread Friday as shares of several other regional banks were also halted as their shares plunged.
The halts included Signature Bank SBNY 0.00%↑, a New York institution that serves some cryptocurrency clients after its shares dropped more than 16%. First Republic Bank FRC 0.00%↑, which serves some companies in the venture world and targets high-net-worth clients from the tech industry, saw shares fall by as much as 40% early Friday. Its shares and those of other regional banks, Western Alliance Bancorp WAL 0.00%↑ and PacWest Bancorp PACW 0.00%↑, were also halted. Trading in those four banks resumed during the day, and shares in all four closed down double digits. PacWest had the biggest drop, nearly 38%.
Another California bank that serves cryptocurrency clients, Silvergate Capital SI 0.00%↑, announced a “voluntary liquidation” Wednesday. Data analytics firm S3 Partners found Silvergate was the most shorted company in the stock market as of Friday by the percentage of float, with more than 84% of its shares available for borrowing being sold short.
By comparison, bets against Silicon Valley Bank, crypto-friendly Signature Bank, and other regional banks such as First Horizon National FHB 0.00%↑ and Bank OZK OZK 0.00%↑ stood at a more modest range of between 5.0% and 5.9% of their float being sold short.
The turmoil was a sign that investors are increasingly concerned about how banks, especially smaller ones, will fare now that the Federal Reserve is aggressively raising interest rates. Investors punished banks on Friday with any perceived exposure to problematic customer bases or large amounts of bonds that could produce losses if banks were forced to sell them.
Many giant banks sidestepped the carnage on Friday, a possible sign that investors view them as stronger and more able to withstand any problems resulting from higher interest rates. Shares for JP Morgan Chase JPM 0.00%↑, the largest bank by assets in the US, rose 2.5%. Bank of America BAC 0.00%↑ and Citigroup C 0.00%↑ were roughly flat. Shares of Goldman Sachs Group GS 0.00%↑ were down more than 4%.
SVB's rise and fall
Silicon Valley Bank was founded in 1983 by Bill Biggerstaff and Robert Medearis over a poker game. The bank started with a strategy of collecting deposits from venture capitalist-financed businesses and survived the dot-com bubble despite a 50% drop in its stock price. By 2011, the Santa Clara bank had helped fund over 30,000 startups.
The recent problems at SVB started with the Fed’s campaign to bring down inflation, which pinched many of its startup and tech clients. An outflow of deposits forced it to sell assets, and bonds, at a loss.
Banks are big bond investors who need many safe places to park their cash. Many of the biggest financial institutions in the country piled into these investments during a period of historically-low interest rates that spanned the early years of the pandemic, as banks took in tons of new deposits and lending was somewhat restrained.
But now the Fed is hiking rates rapidly, with Fed Chair Jerome Powell warning earlier this week that the central bank may have to speed up the increases to cool the economy further. The problem that creates for banks is simple: Higher rates lower the value of their existing bonds.
Across all U.S. banks, unrealized losses on available-for-sale and held-to-maturity securities totaled $620 billion at the end of 2022, according to the Federal Deposit Insurance Corp. FDIC Chair Martin Gruenberg highlighted this risk during a speech on March 6 to an international banking conference.
Banks don’t have to realize these losses if they don’t sell the assets. But SVB Financial didn’t have that choice. Deposit outflows forced their hand. On Thursday, the stock fell 60% on concerns about the bank’s disclosure of a $1.8 billion loss from the sale of bonds and plans to raise $2.25 billion by selling common and preferred stock.
CNBC's David Faber reported early Friday that SVB's planned capital raise had not cleared the market and that the firm was now seeking to sell itself. Then regulators seized SVB's bank. SVB also has a private banking and wealth division, a venture capital and credit investment arm, and investment banking operations.
“This is the most aggressive Fed rate hiking cycle since the 80’s. When you have rates rising so quickly inevitably some thing will break,” said Seema Shah, chief global strategist at Principal Asset Management.
“There's always gonna be some banks in the US which are weaker, but broadly, the US banking industry is fairly well capitalized. So we're not looking at you know, a major financial system collapse by any means at all,” Shah added.
Several analysts said Friday they don’t anticipate SVB Financial’s challenges will cripple other regional banks. Morgan Stanley, said, "the funding pressures facing SIVB are highly idiosyncratic and should not be viewed as a read-across to other regional banks."
"We do not believe there is a liquidity crunch facing the banking industry, and most banks in our coverage have ample access to liquidity," the bank said.
Bank of America analysts said, “we believe that the sharp sell-off in bank stocks” Thursday was likely overdone as investors extrapolated idiosyncratic issues at individual banks to the broader banking sector.”
Nevertheless, Bank of America analysts noted that rising rates are a challenge for all banks. They will affect net interest margins, a key measure of profitability for banks, and will harm the credit quality of their customers.
Excellent write up about the situation! Thanks
Thank you, Akash! So timely, so thorough! What useful analysis. I don't need to turn anywhere else for more information. You nailed it.