Takeaways from America’s second-largest bank failure

New York

Silicon Valley Bank’s 48-hour collapse led to the second-largest failure of a financial institution in US history.

SVB was one of America’s 20 largest commercial banks and is now under the control of the US Federal Deposit Insurance Corporation after it became unable to pay back customers who withdrew their deposits.

Though experts quelled fears of a wider contagion, the bank’s collapse could have significant ramifications on the startup and tech sectors.

Here’s everything we know so far.

Founded in 1983, Silicon Valley Bank provided financing for almost half of US venture-backed technology and health care companies. They have been hurt by higher interest rates and dwindling venture capital.

While relatively unknown outside of Silicon Valley, SVB was among the top 20 American commercial banks, with $209 billion in total assets at the end of last year, according to the FDIC.

Its stunning, and seemingly rapid, fall is the largest shutdown of a US bank since Washington Mutual in 2008.

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CEO describes pulling money from bank hours before collapse

The wheels began to come off Wednesday, when SVB announced it had sold a bunch of securities at a loss, and it would sell $2.25 billion in new shares to shore up its balance sheet.

California regulators closed down the tech lender Friday. The FDIC is acting as a receiver, which typically means it will liquidate the bank’s assets to pay back its customers, including depositors and creditors.

The FDIC, an independent government agency that insures bank deposits and oversees financial institutions, said all insured depositors will have full access to their insured deposits by no later than Monday morning. It said it would pay uninsured depositors an “advance dividend within the next week.”

The FDIC took over in the midmorning Friday; usually it waits until markets close.

“SVB’s condition deteriorated so quickly that it couldn’t last just five more hours,” wrote Better Markets CEO Dennis M. Kelleher. “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.”

To combat rampant inflation, the central bank has been aggressively raising interest rates since 2022. It made borrowing for businesses and individuals more expensive to cool the economy down.

When interest rates were near historical lows, the banks bought up on long-dated, seemingly low-risk Treasuries. But as rates rose, the value of those assets has fallen, leaving them sitting on unrealized losses.

High rates significantly constrained tech companies, which undercut the value of tech stocks and made it difficult to raise funds.

Faced with higher interest rates, loss of IPOs and a funding drought, SVB’s clients began pulling money out of the bank.

“The higher rates have also lowered the value of their treasury and other securities which SVB needed to pay depositors,” Moody’s chief economist Mark Zandi said. “All of this set off the run on their deposits that forced the FDIC to takeover SVB.”

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Hear why ex-US Treasury official questions regulators’ handling of Silicon Valley Bank

US customers held at least $151.5 billion in uninsured deposits by the end of 2022, SVB’s latest annual report said. Foreign deposits reached at least $13.9 billion and are also uninsured.

Companies may have gotten a decent amount out during the bank run, but there is still a lot of money at stake if a buyer or bailout isn’t reached.

Roku held approximately $487 million of its $1.9 billion in cash at Silicon Valley Bank, 26{1668a97e7bfe6d80c144078b89af180f360665b4ea188e6054b2f93f7302966b} of the company’s total. The streaming company added most of the deposits were uninsured. Video game site Roblox and bankrupt cryptocurrency lender BlockFi are also facing the fallout.

On Thursday, billionaire hedge fund manager Bill Ackman compared SVB to Bear Stearns, the first lender to collapse at the start of the 2007-2008 global financial crisis.

“The risk of failure and deposit losses here is that the next, least well-capitalized bank faces a run and fails, and the dominoes continue to fall,” Ackman wrote on Twitter.

But most analysts say the implosion of SVB appears company-specific for now, wrote Julia Horowitz and Anna Cooban.

Banks and lenders with specialized clientele, just like SVB, will feel the brunt of the fallout.

“The reason [SVB is] in trouble is because they have exposure to particular industries,” said Jonas Goltermann, deputy chief markets economist at Capital Economics. Most other banks, he added, are more “diversified.”

There’s also less anxiety about the stability of the banking sector due to the significant regulatory reforms put in place after the crisis in 2008.

Everyday consumers, on the whole, are unlikely to be affected. But the collapse is a good reminder to be aware of where your money is held, and not to have it all in one place.

“The first bank failure since 2020 is a wake-up call for people to always make sure their money is at an FDIC-insured bank and within FDIC limits and following the FDIC’s rules,” Matthew Goldberg, a Bankrate analyst said.

SVB was a top lender for the startup community, whose founders now worry about getting their money out, making payroll and covering operating expenses, Catherine Thorbecke wrote.

“Now that the bank has folded, I just want to know what happens next,” Ashley Tyrner, founder of health food delivery company FarmboxRx, told CNN in an e-mail. “The FDIC covers 250K, but am I going to recover my whole 8 figures?”

Some are getting creative. Children’s toy, apparel and experience retailer CAMP sent an email to customers Friday and advertised on their site.

“Unfortunately, we had most of our company’s cash assets at a bank which just collapsed. I’m sure you’ve heard the news.” It urged customers to use the code BANKRUN to save 40{1668a97e7bfe6d80c144078b89af180f360665b4ea188e6054b2f93f7302966b} off all merchandise (or pay full price – which it said would be appreciated).

Lenders somewhat similar to SVB are in an unfortunate situation.

Crypto-focused lender Silvergate said it is winding down operations and will liquidate the bank after being financially pummeled by turmoil in digital assets.

“In light of recent industry and regulatory developments, Silvergate believes that an orderly wind down of Bank operations and a voluntary liquidation of the Bank is the best path forward,” it said in a statement Wednesday.

But the risks of broader contagion are thought to be limited for now.

“Overall, the banking system is in good shape and able to withstand significant shocks,” said Jens Hagendorff, a finance professor at King’s College London. “I think SVB is special in the sense that they have a fickle depositor base.”

The Dow fell by 345 points, or 1.1{1668a97e7bfe6d80c144078b89af180f360665b4ea188e6054b2f93f7302966b} on Friday. The S&P 500 dropped 1.5{1668a97e7bfe6d80c144078b89af180f360665b4ea188e6054b2f93f7302966b} and the Nasdaq Composite was 1.8{1668a97e7bfe6d80c144078b89af180f360665b4ea188e6054b2f93f7302966b} lower.

For the week, The Dow fell by 4.4{1668a97e7bfe6d80c144078b89af180f360665b4ea188e6054b2f93f7302966b}, its worst week since June. The S&P 500 was down 4.6{1668a97e7bfe6d80c144078b89af180f360665b4ea188e6054b2f93f7302966b} and the Nasdaq was 4.7{1668a97e7bfe6d80c144078b89af180f360665b4ea188e6054b2f93f7302966b} lower.

Wall Street’s fear gauge, the VIX, jumped 15{1668a97e7bfe6d80c144078b89af180f360665b4ea188e6054b2f93f7302966b} on Friday afternoon as investors rushed to safe havens to avoid being pulled into any banking sector contagion, the markets team reported.

Democratic Sen. Elizabeth Warren called for authorities to come down hard on Silicon Valley Bank management in the aftermath of the historic bank failure, CNN’s Matt Egan reported. She is a strong supporter of strict oversight of banks.

“SVB executives must be held accountable for any malfeasance or mismanagement that led to this failure,” Warren said in a statement late Friday.

The Massachusetts Democrat said she is receiving regular updates from the FDIC, which seized control of the bank, which has 17 branches in California and Massachusetts.

“I expect there will soon be a better assessment of how much help is available for customers in Massachusetts and across the nation,” Warren said.

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