The bank went bankrupt after depositors – mainly technology workers and venture-backed companies – made a run for it.
The Federal Deposit Insurance Corporation on Friday seized the assets of Silicon Valley Bank, the largest bank failure since Washington Mutual during the height of the 2008 financial crisis.
The bank went bankrupt after depositors, mostly technology workers and venture-backed companies, began withdrawing their money, causing a run on the bank.
Silicon Valley was heavily exposed to the technology industry and there is little chance of contagion in the banking sector as it was in the months leading up to the Great Recession more than a decade ago. Big banks have enough capital to avoid a similar situation.
The FDIC ordered the closure of Silicon Valley Bank and immediately took possession of all deposits at the bank on Friday. The bank had $209 billion in assets and $175.4 billion in deposits at the point of failure, the FDIC said in a statement. It was unclear how many of the deposits were above the $250,000 insurance limit at this point.
Notably, the FDIC has not announced a buyer of Silicon Valley assets, which is typical when there is an orderly liquidation of a bank. The FDIC also seized the bank’s assets in the middle of the business day, a sign of how dire the situation had become.
Silicon Valley Bank’s financial health was increasingly questioned this week after the bank announced plans to raise up to $1.75 billion to strengthen its capital position amid concerns about higher interest rates and the economy. Shares of SVB Financial Group, the parent company of Silicon Valley Bank, were down nearly 70 percent before trading was halted for the opening bell on the Nasdaq.
CNBC reported that attempts to raise capital failed and the bank now wanted to sell itself.
Bruise week
As the 16th largest bank in the country, the Silicon Valley bank is no small feat. It acts as a major financial conduit for venture-backed (VC-backed) companies, which have been hit hard over the past 18 months as the Federal Reserve raised interest rates and made riskier tech assets less attractive to investors.
Venture-backed companies were reportedly advised to take at least two months’ worth of “burn” money from Silicon Valley Bank to cover their expenses. Typically, venture capital-backed companies are not profitable, and how quickly they use the money they need to run their business — their so-called “burn rate” — is a typically important metric for investors.
Shares of diversified banks such as Bank of America and JPMorgan pulled back from an early slump following data released Friday by the Department of Labor showing wage increases slowed in February. But regional banks, especially those with heavy exposure to the technology industry, declined.
Anyway, it’s been a bloody week. Shares of major banks are down between 7 and 12 percent this week.
Treasury Secretary Janet Yellen told lawmakers on Capitol Hill Friday that the department was aware of recent developments and was monitoring the situation, calling it “a concern” when banks take losses, according to CNBC.
U.S. regulators were observed arriving at the bank’s California offices on Friday, Bloomberg News reported.
