Silicon Valley Bank collapse sends markets, tech startups scrambling

(CNN) — Silicon Valley Bank collapsed Friday morning after a stunning 48 hours in which a bank run and a capital crisis led to the second-largest failure of a financial institution in US history.

California regulators closed down the tech lender and put it under the control of the US Federal Deposit Insurance Corporation. 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 bank, previously owned by SVB Financial Group, didn’t respond to CNN’s request for comment.

What happened?

Silicon Valley Bank’s decline stems partly from the Federal Reserve’s aggressive interest rate hikes over the past year.

After years of interest rates hovering around zero, the central bank last spring began a series of historic rate hikes to make borrowing for businesses and individuals more expensive — a way to cool the economy and bring inflation in line.

Higher rates hit tech especially hard, undercutting the value of tech stocks and making it tough to raise funds, Moody’s chief economist Mark Zandi said. That prompted many tech firms to draw down the deposits they held at SVB to fund their operations.

“Higher rates have also lowered the value of their treasury and other securities which SVB needed to pay depositors,” Zandi said. ” All of this set off the run on their deposits that forced the FDIC to takeover SVB.”

Echoes of 2008

Despite initial panic on Wall Street over the run on SVB, which caused its shares to crater, analysts said the bank’s collapse is unlikely to set off the kind of domino effect that gripped the banking industry during the financial crisis.

“The system is as well-capitalized and liquid as it has ever been,” Zandi said. “The banks that are now in trouble are much too small to be a meaningful threat to the broader system.”

But smaller banks that are disproportionately tied to cash-strapped industries like tech and crypto may be in for a rough ride, according to Ed Moya, senior market analyst at Oanda.

“Everyone on Wall Street knew that the Fed’s rate-hiking campaign would eventually break something, and right now that is taking down small banks,” Moya said.

Stock tumbles for second day

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.

It’s the largest lender to fail since Washington Mutual collapsed in 2008.

The bank partnered with nearly half of all venture-backed tech and health care companies in the United States, many of which pulled deposits out of the bank.

SVB’s shares were halted Friday morning after falling more than 60% in premarket trading. The stock tumbled 60% Thursday after the bank said it had to sell a portfolio of US Treasuries and $1.75 billion in shares at a loss to cover rapidly declining customer deposits — essentially facing a run on the bank.

Several other bank stocks were temporarily halted Friday, including First Republic, PacWest Bancorp, and Signature Bank.

By Friday, the panic appeared to ease. Bank stocks remained largely down, but stable.

Mike Mayo, Wells Fargo senior bank analyst, said the crisis at SVB may be “an idiosyncratic situation.”

“This is night and day versus the global financial crisis from 15 years ago,” he told CNN’s Julia Chatterly on Friday. Back then, he said, “banks were taking excessive risks, and people thought everything was fine. Now everyone’s concerned, but underneath the surface the banks are more resilient than they’ve been in a generation.”

Rate hikes take a bite

SVB’s sudden fall mirrored other risky bets that have gotten exposed in the past year’s market turmoil.

Crypto-focused lender Silvergate said Wednesday it is winding down operations and will liquidate the bank after being financially pummeled by turmoil in digital assets. Signature Bank, another crypto-friendly lender, was hit hard by the bank selloff, with shares sinking 30% before being halted for volatility Friday.

“SVB’s institutional challenges reflect a larger and more widespread systemic issue: The banking industry is sitting on a ton of low-yielding assets that, thanks to the last year of rate increases, are now far underwater — and sinking,” wrote Konrad Alt, co-founder of Klaros Group.

Alt estimated that rate increases have “effectively wiped out approximately 28% of all the capital in the banking industry as of the end of 2022.”

When interest rates were near zero, banks loaded up on long-dated, low-risk Treasuries. But as the Fed raises interest rates to fight inflation, the value of those assets has fallen, leaving banks sitting on unrealized losses.

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