Silicon Valley Bank is largest failure since 2008 crisis, billions
stranded
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[March 11, 2023] By
David French, Echo Wang and Alun John
(Reuters) - Startup-focused lender SVB Financial Group became the
largest bank to fail since the 2008 financial crisis on Friday, in a
sudden collapse that roiled global markets, left billions of dollars
belonging to companies and investors stranded.
California banking regulators closed the bank, which did business as
Silicon Valley Bank, on Friday and appointed the Federal Deposit
Insurance Corporation (FDIC) as receiver for later disposition of its
assets.
Based in Santa Clara, the lender was ranked as the 16th biggest in the
U.S. at the end of last year, with about $209 billion in assets.
Specifics of the tech-focused bank's abrupt collapse were a jumble, but
the Fed's aggressive interest rate hikes in the last year, which had
crimped financial conditions in the start-up space in which it was a
notable player, seemed front and center.
As it tried to raise capital to offset fleeing deposits, the bank lost
$1.8 billion on Treasury bonds whose values were torpedoed by the Fed
rate hikes.
Silicon Valley Bank's failure is the largest since Washington Mutual
went bust in 2008, a hallmark event that triggered a financial crisis
that hobbled the economy for years. The 2008 crash prompted tougher
rules in the United States and beyond.
Since then, regulators have imposed more stringent capital requirements
for U.S. banks aimed at ensuring individual bank collapses won't harm
the wider financial system and economy.
The main office and all branches of Silicon Valley Bank will reopen on
March 13 and all insured depositors will have full access to their
insured deposits no later than Monday morning, the FDIC said.
But 89% of the bank's $175 billion in deposits were uninsured as the end
of 2022, according to the FDIC, and their fate remains to be determined.
The FDIC is racing to find another bank over the weekend that is willing
to merge with Silicon Valley Bank, according to people familiar with the
matter who requested anonymity because the details are confidential.
While the FDIC hopes to put together such a merger by Monday to
safeguard unsecured deposits, no deal is certain, the sources added.
An FDIC spokesperson did not immediately respond to a request for
comment.
BUYERS SOUGHT
Separately, SVB Financial, the parent company of Silicon Valley Bank, is
working with investment bank Centerview Partners and law firm Sullivan &
Cromwell to find buyers for its other assets, which include investment
bank SVB Securities, wealth manager Boston Private and equity research
firm MoffettNathanson, the sources said. These assets could attract
competitors and private equity firms, the sources added.
It's unclear if any buyer will step up to buy these assets without SVB
Financial having filed for bankruptcy first. Credit ratings agency S&P
Global Ratings said on Friday it expected SVB Financial to enter
bankruptcy because of its liabilities.
SVB did not respond to calls for comment.
Companies such as video game maker Roblox Corp and streaming device
maker Roku Inc said they had hundreds of millions of dollars in deposits
at the bank. Roku said its deposits with SVB were largely uninsured,
sending its shares down 10% in extended trading.
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SVB (Silicon Valley Bank) logo is seen
through broken glass in this illustration taken March 10, 2023.
REUTERS/Dado Ruvic/Illustration
Technology workers whose paychecks relied on the bank were also
worried about getting their wages on Friday. An SVB branch in San
Francisco showed a note taped to the door telling clients to call a
toll-free telephone number.
SVB Financial CEO Greg Becker sent a video message to employees on
Friday acknowledging the "incredibly difficult" 48 hours leading up
to the collapse of the bank.
The problems at SVB underscore how a campaign by the U.S. Federal
Reserve and other central banks to fight inflation by ending the era
of cheap money is exposing vulnerabilities in the market. The
worries walloped the banking sector.
U.S. banks have lost over $100 billion in stock market value over
the past two days, with European banks losing around another $50
billion in value, according to a Reuters calculation.
U.S. lenders First Republic Bank and Western Alliance said on Friday
their liquidity and deposits remained strong, aiming to calm
investors as their shares fell. Others such as Germany's Commerzbank
issued unusual statements to reassure investors.
MORE PAIN
Some analysts forecast more pain for the sector as the episode
spread concern about hidden risks in the banking sector and its
vulnerability to the rising cost of money.
"There could be a bloodbath next week as...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.
U.S. Treasury Secretary Janet Yellen met banking regulators on
Friday and expressed "full confidence" in their abilities to respond
to the situation, Treasury said.
The White House said on Friday it had faith and confidence in U.S.
financial regulators, when asked about the failure of SVB.
The genesis of SVB's collapse lies in a rising interest rate
environment. As higher interest rates caused the market for initial
public offerings to shut down for many startups and made private
fundraising more costly, some SVB clients started pulling money out.
To fund the redemptions, SVB sold a $21 billion bond portfolio
consisting mostly of U.S. Treasuries on Wednesday, and said it would
sell $2.25 billion in common equity and preferred convertible stock
to fill its funding hole.
By Friday, the collapsing stock price had made its capital raise
untenable and sources said the bank tried to look at other options,
including a sale, until regulators stepped in and shut the bank
down.
The last FDIC-insured institution to close was Almena State Bank in
Kansas, on Oct. 23, 2020.
(Writing By John O'Donnell, Noor Zainab Hussain, Paritosh Bansal;
Additional reporting by Niket Nishant, Emma-Victoria Farr, Nathan
Frandino, Anna Tong, Krystal Hu, Greg Bensinger, Pete Schroeder,
Greg Roumeliotis, Jo Mason, Marc Jones, Iain Withers, Elizabeth
Howcroft, Noel Randewich, Yoruk Bahceli, Lananh Nguyen, Eva Matthews
and Nupur Anand; Writing by Nick Zieminski; Editing by Toby Chopra,
Anna Driver, William Mallard and Raju Gopalakrishnan)
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