Regulators shut down Silicon Valley Bank on Friday to protect depositors.
The bank, which lent to venture capital-backed start-ups, is the largest FDIC-insured bank by assets to fail since 2008, according to Dow Jones Market Data. It’s also the first bank to fail since 2020, according to the Federal Deposit Insurance Corporation, or FDIC.
The California Department of Financial Protection and Innovation closed down the bank, and appointed the FDIC as receiver. The FDIC created the Deposit Insurance National Bank of Santa Clara and immediately transferred all insured deposits of SVB to the DINB at the time of closing.
Insured depositors will have full access to their deposits no later than Monday morning, the FDIC said. FDIC’s standard insurance amount is $250,000 per depositor, per insured bank. The regulator tells those with accounts of more than $250,000 to contact them directly.
For uninsured depositors, the FDIC will pay an advance dividend within the next week. Uninsured depositors will get a receivership certificate for the remaining amount of their uninsured funds, the agency said.
The DINB will maintain SVB’s banking hours and the bank’s main office will reopen on Monday. Banking activities will also resume that day, the agency said, which includes online banking and other services.
Shares of SVB Financial Group (ticker: SIVB), the bank’s parent, plummeted as much as 66% in premarket trading Friday before the stock was halted for news pending. Nasdaq said it will delist SVB’s stock, per its listing rules. Even if the company appeals, shares would trade over the counter, not on the exchange.
Following the news of SVB’s shutdown, the KBW bank index (ticker: BKX) fell 3.1%.
Treasury Secretary Janet Yellen said she was monitoring the troubles at the bank.
“There are recent developments that concern a few banks that I’m monitoring very carefully, and when banks experience financial losses, it is and it should be a matter of concern,” Yellen said Friday while testifying before the House Ways and Means Committee.
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What Happened to SVB?
Shares of SVB sank Thursday after the bank sold assets for a loss following a decline in deposits. The impact rippled through the banking sector, which many investors had assumed was largely insulated from recession worries and rising rates
SVB’s troubles came as the Silicon Valley-based lender was forced to sell securities to realign its portfolio in response to higher interest rates while it manages lower deposit levels from clients, many of which are in the venture capital arena and burning through cash.
SVB stock fell 60% to $106.04 on Thursday. The Thursday decline, the steepest among companies in the S&P 500, was the largest percentage decrease ever for shares.
The selloff caused traders to take a closer look at all bank stocks—particularly their deposits—causing the KBW Nasdaq Bank Index to fall 7.7% on Thursday, its worst showing since June 11, 2020, when it fell 9%.
SVB, parent of Silicon Valley Bank, enjoyed a bull run in 2021 as it lent to venture capitalist-backed start-ups in technology, life sciences and healthcare, and even Napa Valley wineries, in an era of low interest rates and easy money.
It’s fallen on hard times since then. SVB’s stock has dropped more than 80% from its record high in late 2021 as interest rates have increased, boosting the cost of the deposits the bank uses to fund loans. The company in its press release on Wednesday said its latest actions were partly due to expectations for a continued higher interest-rate environment and partly because deposit levels have declined.
Given the current volatile economic environment, venture-capital firms have been less willing to fund start-ups—a problem for SVB, which gets deposits from VC-backed start-ups that were earlier flush with cash. As of Feb. 28, SVB had client funds of $326 billion, a decline from $341 billion at the end of last year.
“What we learned over the last 12 to 24 months is that in a fast-paced rising rate environment, customer deposit dynamics are different than what we had expected,” said Chief Financial Officer Daniel Beck in a conference call with Bank of America analysts days ahead of Wednesday’s update.
The decline in deposits forced SVB to take drastic action. After Wednesday’s market close, SVB said it sold all of its $21 billion in securities classified as available for sale (AFS), a portfolio essentially comprised of U.S. Treasury and mortgage-backed securities. It said it suffered an after-tax loss of $1.8 billion, to be recorded in the first quarter of 2023, as a result. Prices of fixed-income securities such as MBS and Treasury debt fall as interest rates go up.
The company planned to reinvest the proceeds from the sale into shorter-term debt to take advantage of rising rates. SVB also said it would raise $2.25 billion, including $500 million from private-equity firm General Atlantic and offering $1.25 billion of convertible preferred and common stock to investors.
“The sale of substantially all of our AFS securities will enable us to increase our asset sensitivity, partially lock in funding costs, better insulate net interest income (NII) and net interest margin (NIM) from the impact of higher interest rates, and enhance profitability,” SVB said.
The sale of banks’ so-called AFS securities has been a risk lurking in the market since the Federal Reserve began its efforts to lift interest rates to tamp down on inflation last year. Rising inflation has forced clients to spend down their deposits—a low-cost source of funding for banks. As that dries up, banks are forced to turn to their securities portfolio to raise capital but with bond prices down, the banks are selling those securities at a loss.
With the broader market losing its interest in high-growth stocks, it was expected that some of those worries would transfer to the venture capital space.
The fear now is that other banks will face the same troubles, which explains the sell-off. Banks take deposits, which they then use to make loans or buy securities. If their deposits were to fall, as SVB’s did, they would be forced to sell assets at a loss.
Some observers contend the worries are overblown. SVB had a singular funding base, which made life difficult for it when start-up companies ran out of easy cash. The country’s largest banks, though, have more diverse funding sources, which should help insulate them from SVB’s problems, according to Wells Fargo Securities analyst Mike Mayo,
“[The] ‘SIVB moment’ is not fully indicative of the industry but affects sentiment,” Mayo wrote Thursday.
Sometimes, though, sentiment is all that matters.
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