On Friday, SVB Financial Group, a lender that focused on startups, failed and became the largest bank to do so since the 2008 financial crisis. California banking regulators closed the bank, which was known as Silicon Valley Bank, and appointed the Federal Deposit Insurance Corporation (FDIC) as its receiver.
The bank’s collapse caused turmoil in global markets and left billions of dollars belonging to companies and investors stranded. Silicon Valley Bank had about $209B in assets and was ranked as the 16th biggest bank in the U.S. at the end of last year.
The bank’s abrupt collapse was likely due to the Fed’s aggressive interest rate hikes in the past year, which had affected financial conditions in the startup space. As the bank tried to raise capital to offset fleeing deposits, it lost $1.8B on Treasury bonds whose values were affected by the Fed rate hikes. Silicon Valley Bank’s failure is the largest since Washington Mutual went bust in 2008.
The FDIC is currently trying to find another bank over the weekend that is willing to merge with Silicon Valley Bank to safeguard unsecured deposits, but no deal is certain.
SVB Financial CEO Greg Becker acknowledged in a video message to employees on Friday the challenging 48 hours leading up to the bank’s collapse. This situation highlights how the U.S. Federal Reserve and other central banks’ campaign to fight inflation by ending the era of cheap money is exposing market vulnerabilities, according to reports.
This has caused significant losses in the banking sector, with U.S. banks losing over $100B in stock market value over the past two days, and European banks losing around $50B in value.
While some banks are reassuring investors that their liquidity and deposits remain strong, analysts predict more pain for the sector as concerns about hidden risks in the banking industry and its vulnerability to the rising cost of money grow, according to Reuters.
The U.S. Treasury Secretary Janet Yellen expressed full confidence in banking regulators’ ability to respond to the situation, and the White House has faith in U.S. financial regulators. However, some experts anticipate further difficulties in the sector, with short sellers potentially attacking smaller banks.
The collapse of SVB can be attributed to the increasing interest rates, which caused the market for initial public offerings to close for many startups, making private fundraising more expensive. This led to some SVB clients withdrawing their funds. To cover the redemptions, SVB sold a $21B bond portfolio primarily consisting of U.S.
Treasuries on Wednesday announced plans to sell $2.25B in common equity and preferred convertible stock to fill the funding gap. However, the falling stock price made it impossible for the bank to raise the required capital, and it explored other options, including a sale, before regulators intervened and closed the bank down.