SANTA CLARA, Calif. — Silicon Valley Bank collapsed Friday in the second-largest bank failure in U.S. history after a run on deposits doomed the tech-focused lender’s plans to lift new capital.
The Federal Deposit Insurance Corp. said it took control of the bank through a new entity it created, Deposit Insurance National Bank of Santa Clara. All bank deposits were transferred to the new bank, the regulator said.
Insured depositors will have access to their funds by Monday morning, the FDIC said. Depositors whose funds exceed insurance limits will get escrow certificates for their uninsured balances, which means companies with large deposits stuck in the bank are unlikely to be withdrawing their money soon.
The bank is the 16th largest in the United States, with some $209 billion in assets as of December 31, according to the Federal Reserve. It is by far the largest bank to fail since the near collapse of the financial system in 2008, second only to the collapse of Washington Mutual Inc. during the crisis.
The bank’s parent company, SVB Financial Group, was racing to find a buyer after canceling a planned $2.25 billion share sale on Friday morning. Regulators were unwilling to wait. California’s Department of Financial Protection and Innovation shut down the bank within hours on Friday and placed it under FDIC scrutiny.
The bank’s problems have dragged down a wide swath of the industry. Investors dumped shares of large and small banks on Thursday, slashing the value of the four largest U.S. banks alone by $52 billion. Megabanks rallied on Friday, but many of their smaller counterparts continued to dive. Several have been arrested for volatility.
Investors are concerned about banks with a profile similar to SVB. Shares of San Francisco-based First Republic Bank,
which caters to businesses and high net worth individuals, have fallen about 30% since Wednesday. “First Republic’s deposit base is strong,” the bank said on Friday.
PacWest Bancorp shares have fallen 54% in the past two days. More than two-thirds of its loan portfolio is property-related, with a significant portion lent to venture capitalists.
SVB was primarily aimed at the island ecosystem of startups and the investors who fund them. Its deposits have exploded alongside the tech industry, rising 86% in 2021 to $189 billion and peaking at $198 billion a quarter later. The bank made large amounts of deposits in US Treasury bills and other government-sponsored debt securities.
The technology fell after the Federal Reserve began raising rates last year to curb inflation. As a result, startups emptied their deposits with SVB faster than expected by the bank. And new investment has stalled, which means new money isn’t coming into the bank.
Meanwhile, rising interest rates have shaken the value of SVB’s huge bond portfolio. The bank needed fresh capital.
SVB has hired the Goldman Sachs group Inc.
earlier this week to execute a private equity sale, with the intention of announcing it once completed to avoid scaring off investors, according to a person familiar with the offering.
Then Moody’s Investors Service notified SVB that it planned to downgrade the bank’s credit ratings, the person said. Generally, Moody’s notifies issuers 24 hours in advance of a change in credit rating.
Bankers and SVB executives feared a downgrade would hurt the company more than a stock sale, the person familiar with the deal said. They rushed to bring in private equity firm General Atlantic to anchor the deal with a $500 million commitment and announced the expected sale after the market closed on Wednesday. Moody’s downgraded the company later that evening.
SVB shares fell sharply after the market opened on Thursday. The stock’s violent movement alarmed customers, who began withdrawing their money from the bank to avoid ending up with losses in the event of failure.
Chief executive Greg Becker tried to reassure customers on a call Thursday, telling them the bank was on solid financial footing despite the losses. It did not work. Venture capitalists have advised startups to get their money out of the bank to avoid losses on deposits that exceed the FDIC’s $250,000 insurance cap. The bank had more than $151 billion in deposits that exceeded the FDIC limit at the end of 2022.
What does the Silicon Valley bank failure mean?
Silicon Valley Bank collapsed Friday, becoming the largest bank to fail since the 2008 financial crisis. On Monday, March 13, at 3:00 p.m. ET, join the Journal’s Wall Street and Financial Industry Bureau Chief , Dana Cimilluca, for a conversation on what bank failure means for global markets and regulators.
Rival banks have been inundated with calls from potential customers seeking to move their balances.
Alison Greenberg, co-founder of Los Angeles-based maternity care startup Ruth Health, was in a meeting Thursday when she received a frantic email from a seed investor.
“Basically it said ‘Things are imploding at SVB, you urgently need your money out’,” Ms Greenberg said.
Audrey Wu, co-founder of Ruth Health, began making transfers from the company’s account of different denominations, hoping not to trigger automated systems that would flag transactions and possibly delay them.
As she was preparing to make the final transfer from the account, SVB’s website crashed and she was unable to log in again, she said.
SVB stock fell more than 60% to $106.04 on Thursday.
Goldman bankers arranged for SVB to sell shares at $95 apiece on Thursday afternoon, according to people familiar with the offer. As the stock continued to fall and more customers withdrew their deposits from the bank, that deal fell apart, these people said.
Some supporters tried to rally support for the bank. Fintech investor Restive Ventures said in an email early Friday morning that it was keeping its money at SVB and encouraging its portfolio companies to do the same. “Moving a company’s cash under time pressure, over the internet, is a recipe for disaster,” the email reads.
The stock sale was canceled a few hours later. The bank told employees to “work from home today and until further notice,” according to a copy of the email seen by The Wall Street Journal.
By 9 a.m. on the West Coast, regulators had seized the bank.
More than two dozen people, some of whom identified themselves as customers, descended on the bank’s headquarters in Santa Clara on Friday morning. An FDIC press release announcing the bank’s closure was taped on a locked door.
“We’re having a lot of issues right now,” one customer said in a phone call. “We shouldn’t have had all our eggs in one basket,” he added.
Jack Singh, Advisor at Avahi Inc., a Startup Consulting Partner for Amazon Web Services, Amazon.com Inc.
cloud computing branch, said the company yesterday began trying to send wire transfers from SVB to an account at JPMorgan Chase & Co. As of this morning, some of those transfers were unsuccessful. He showed up at the bank headquarters to see if he could withdraw even $40,000 or $50,000.
Mr. Singh said he had payroll to do. “There are individuals who are relying on the money that is being held in the bank,” he said, adding, “It’s Friday and everything is just on hiatus. So we’re definitely going to start getting phone calls. ’employees.
His 6-year-old son overheard a conversation he was having with an accountant about the situation, Mr Singh said. The boy took out his wallet and tried to give his father a few dollars.
—Ben Foldy and Dana Cimilluca contributed to this article.
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