Silicon Valley Bank (SVB), a tech-focused lender, was closed down by US regulators on Friday due to a rush of deposit outflows.
The bank’s woes were also worsened by failed efforts to raise new capital, marking a significant fall for the company that was valued at more than $44bn less than 18 months ago. The company is over 40 years old.
The closure has made SVB the second-largest bank failure in US history after Washington Mutual’s collapse in 2008. The regulator, Federal Deposit Insurance Corporation (FDIC), guarantees bank deposits of up to $250,000 and has guaranteed deposits in SVB, making payouts to depositors with balances exceeding this amount in due course.
The bank’s customers include tech and healthcare startups, venture capitalists, etc. mostly based in Silicon Valley. Reports suggest most of the clients have deposited in excess of the amount insured by FDIC.
The regulator announced that insured depositors would have access to their funds by Monday, while other depositors would receive an initial payment next week, and the rest would depend on what happens to SVB’s assets.
Usually, regulators merge failed lenders with more stable and larger institutions, and the FDIC would use the sale proceeds of SVB to fund payouts to larger depositors. However, the prices on SVB’s bonds have plunged, with its senior debt trading at about 45 cents on the dollar and its junior debt as low as 12.5 cents, indicating that bondholders are braced for heavy losses.
Why SVB failed
The bank’s troubles stem from a decision made during the peak of the tech boom to park $91billion of its deposits in long-dated securities such as mortgage bonds and US Treasuries, which were deemed safe but are now worth $ 15 billion less than when SVB purchased them after the Federal Reserve aggressively raised interest rates.
As Nairametrics has often reported, the global rise in interest rates often leads to a drop in asset valuations including bond prices. The company had to sell down some of the bonds at a huge discount to fund large customer withdrawals.
However, the sale proceeds led to a gaping loss and were also not enough to meet all the deposit needs of its customers, leading to the collapse.
The bank did try to raise capital to avoid a collapse but on Friday, it abandoned its efforts to raise $2.25 billion in new funding to cover losses on its bond portfolio and began looking for a buyer to save it. Unfortunately, no buyer showed up, forcing the FDIC to take over.
SVB shares were halted during early trading on New York’s Nasdaq exchange, and its woes hit shares in several other US banks that are seen to have similar depositor and funding profiles. Trading in Pacific West, Western Alliance, and First Republic were stopped due to volatility after they all initially fell from 40% to 50%.
Trading was also briefly stopped in Signature Bank after its shares fell nearly 30%. Several of those banks sought to reassure the market by putting out statements highlighting their differences from SVB in terms of asset and depositor base.
SVB’s closure highlights the vulnerability of even well-established banks to changing market dynamics and the potential ripple effects that can be caused when they fail.
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