California: California banking regulators on Friday (California time) closed SVB Financial Group, the largest bank failure since the financial crisis, moving quickly to protect depositors at the startup-focused lender.

The regulator appointed the Federal Deposit Insurance Corporation (FDIC) as receiver, putting the tech-heavy lender into receivership and will dispose of its assets, according to a statement.

Silicon Valley Bank has collapsed after a run. Credit:Bloomberg

Silicon Valley Bank is the first FDIC-insured institution to fail this year, the FDIC said. The last FDIC-insured institution to close was Almena State Bank in Kansas, on October 23, 2020.

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, according to the FDIC statement.

Technology workers whose paychecks relied on the bank were worried about getting paid on Friday. An SVB branch in San Francisco showed a taped note telling clients to call a toll-free telephone number.

SVB, which does business as Silicon Valley Bank, was not immediately available for comment.

Dean Nelson, CEO of Cato Digital, was in a line outside of SVB Santa Clara headquarters, hoping to get answers. “If you’re all here and things are locked up, it’s very difficult to operate your company,” he said. “But they just came out to tell us the bank is shut down.”

US banks have lost over $100 billion ($152 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.

Some forecast more pain for the sector

“There could be a bloodbath next week as banks are in trouble, the 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.

Treasury Secretary Janet Yellen told legislators on Capitol Hill the department was aware of recent developments and was monitoring the situation, calling it “a matter of concern” when banks experience losses, according to CNBC.

The FDIC said it would seek to sell SVB’s assets and that future dividend payments may be made to uninsured depositors.

The startup-focused lender scrambled this week to reassure its venture capital clients their money was safe after a capital raise led to its stock collapsing 60 per cent and contributed to wiping out over $80 billion in value from bank shares.

Shares of SVB were halted on Friday after tumbling as much as 66 per cent in premarket trading.

The rout in SVB’s stock which began on Thursday spilled over into other US and European banks, with the episode spreading concern about hidden risks in the sector and its vulnerability to the rising cost of money. But banking shares were well off their lows on Friday.

US treasury secretary Janet Yellen said the government was watching the situation. Credit:Bloomberg

Mid-sized banks were hard hit as SVB’s failure reverberated across the financial industry, with the S&P 500 regional banks index dropping over 5 per cent and bringing its loss this week to 19 per cent, its worst week since 2009.

The S&P 500 banks index dropped 0.5 per cent on Friday after a 6.6 per cent decline on Thursday, while the KBW Regional Banking index was down 2.8 per cent. Europe’s STOXX banking index fell almost 4 per cent, its biggest one-day slide in about a year.

The problems at SVB underscore how a campaign by the US Federal Reserve and other central banks to fight inflation by ending the era of cheap money is exposing vulnerabilities in the market.

“Silicon Valley Bank is shedding light on vulnerabilities across the US banking sector, primarily in the bond holdings that many large institutions hold,” said Karl Schamotta, Chief Market Strategist at Corpay.

‘Chaos’ as clients rush to withdraw

As higher interest rates caused the market for initial public offerings to shut down for many startups and made private fundraising more costly, some Silicon Valley Bank clients started pulling money out to meet their liquidity needs.

This culminated in Silicon Valley Bank looking for ways this week to meet its customers’ withdrawals.

To fund the redemptions, SVB sold on Wednesday a $21 billion bond portfolio consisting mostly of US Treasuries. SVB announced on Thursday it would sell $2.25 billion in common equity and preferred convertible stock to fill its funding hole.

One UK-based principal at a venture capital firm, who asked to be anonymous because he is not authorised to speak to press, said that his firm had rushed to pull “single-digit millions” from four accounts at Silicon Valley Bank late on Thursday.

The source characterised the situation as “chaos.”

He said that almost all of his firm’s US-based funds and investments bank with SVB, and it was not known if those firms had been able to pull out funds.

The technology sector has been hit hard and stress has appeared in other corners of the market as rates rise.

Crypto-focused bank Silvergate Capital Corp said on Wednesday it planned to wind down operations and voluntarily liquidate after it was hit with losses following the dramatic collapse of crypto exchange FTX.

Silvergate shares rebounded Friday to $3.04 after a sharp drop in the prior session. They had traded above $100 a share a year ago.

Sources familiar with the situation said on Thursday that some startups had advised their founders to pull out their money from SVB as a precautionary measure.

Short sellers in SVB have profited by $717 million since Wednesday’s close, according to analytics firm Ortex.

“The market is tired of companies that do business with unprofitable companies or that are unprofitable themselves,” said David Trainer, CEO of New Constructs, an investment research firm.

Reuters

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