Silicon Valley Bank is the most recent and fastest bank failure in American history. A timeline of the SVB's demise.
Silicon Valley Bank is the most recent and fastest bank failure in American history. A timeline of the SVB's demise.
Faced with a sudden bank run and capital crisis, Silicon Valley Bank collapsed Friday morning and was taken over by federal regulators.
What is SVB?
SVB, which was founded in 1983, specializes in banking for technology startups. It funded nearly half of all venture-backed technology and healthcare companies in the United States. While relatively unknown outside of Silicon Valley, SVB was one of the top 20 American commercial banks at the end of last year, with $209 billion in total assets, according to the FDIC.
Why did it fail?
In short, SVB experienced a classic bank run. The longer version is a little trickier. Several forces came together to bring down the banker. First, there was the Federal Reserve, which began raising interest rates a year ago to tame inflation. The Fed acted quickly, and higher borrowing costs sapped the momentum of tech stocks, which had benefited SVB. Higher interest rates also eroded the value of long-term bonds purchased by SVB and other banks during the ultra-low, near-zero interest rate era. At the same time, venture capital began to dry up, forcing startups to rely on SVB funds. So the bank was sitting on a mountain of unrealized bond losses at the same time that customer withdrawals were increasing.
The panic takes root…
SVB announced on Wednesday that it had sold a number of securities at a loss and that it would also sell $2.25 billion in new shares to shore up its balance sheet. This reportedly caused panic among key venture capital firms, which advised companies to withdraw their funds from the bank. The bank's stock began to fall Thursday morning, and by the afternoon, it was dragging down other bank shares, as investors began to fear a repeat of the 2007-2008 financial crisis. Trading in SVB shares had ceased by Friday morning, and the company had abandoned efforts to quickly raise capital or find a buyer. California regulators stepped in, shutting down the bank and placing it under the supervision of the Federal Deposit Insurance Corporation.
Contagion fears subside
Despite the initial panic on Wall Street, analysts believe SVB's demise will not cause the type of domino effect that gripped the banking industry during the financial crisis.
“The system is as well-capitalized and liquid as it has ever been,” Moody’s chief economist Mark Zandi said. “The banks that are now in trouble are much too small to be a meaningful threat to the broader system.”
As stated by the FDIC, all insured depositors will have full access to their funds by Monday morning. It will pay an "advance dividend" to uninsured depositors "within the next week."
What’s next?
According to Ed Moya, senior market analyst at Oanda, while a broader contagion is unlikely, smaller banks disproportionately tied to cash-strapped industries like tech and crypto may be in for a rough ride.
“Everyone on Wall Street knew that the Fed’s rate-hiking campaign would eventually break something, and right now that is taking down small banks,” Moya said on Friday.
The FDIC typically sells the assets of a failed bank to other banks, with the proceeds used to repay depositors whose funds were not insured. SVB could still find a buyer, though this is far from certain.