The Federal Deposit Insurance Corporation seized the assets of Silicon Valley Bank on Friday, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis. The bank failed after depositors – mostly technology workers and venture capital-backed companies – began withdrawing their money creating a run on the bank. Silicon Valley was heavily exposed to tech industry and there is little chance of contagion in the banking sector as there was in the months leading up to the Great Recession more than a decade ago. Major banks have sufficient capital to avoid a similar situation.
On Friday, the FDIC issued a closure order for Silicon Valley Bank and immediately took possession of all deposits there. At the time of bankruptcy, the bank had assets worth USD 209 billion and deposits worth USD 175.4 billion, according to a statement from the FDIC. At this time, it was unknown how much of the deposits exceeded the USD 250,000 insurance cap. Significantly, the FDIC did not reveal a buyer for Silicon Valley’s assets, as is customary when a bank is being properly wound down.
In a sign of how bad things had gotten, the FDIC also took the bank’s assets in the midst of the work day. Last week, Silicon Valley Bank’s financial stability came under increased scrutiny when the bank revealed plans to raise up to USD1.75 billion to bolster its capital position in response to worries about rising interest rates and the state of the economy. Before trading was suspended on the Nasdaq before the opening bell, shares of SVB Financial Group, the parent company of Silicon Valley Bank, had fallen by almost 70%. According to CNBC, after unsuccessful attempts to acquire cash, the bank is now attempting to sell itself.
Silicon Valley bank was not a small bank, it’s the 16th largest bank in the country, holding USD 210 billion in assets. It acts as a major financial conduit for venture capital-backed companies, which have been hit hard in the past 18 months as the Federal Reserve has raised interest rates and made riskier tech assets less attractive to investors. Venture capital-backed companies were being reportedly advised to pull at least two months’ worth of “burn” cash out of Silicon Valley Bank to cover their expenses.
Typically VC-backed companies are not profitable and how quickly they use the cash they need to run their businesses – their so-called “burn rate” – is a typically important metric for investors. Diversified banks like Bank of America and JPMorgan pulled out of an early slump due to data released Friday by the Labor Department, but regional banks, particularly those with heavy exposure to the tech industry, were in decline. Yet it has been a bruising week. Shares of major banks are down this week between 7 per cent and 12 per cent.