On Friday, US regulators seized the assets of one of the leading banks in Silicon Valley – Silicon Valley Bank, which financed well-known technology startups.
The 16th-largest bank in the country “fell” after depositors began to withdraw funds amid experts’ worries about the institution’s financial health. This is the second largest bank failure in US history since the height of the financial crisis 15 years ago and the collapse of Washington Mutual in 2008.
Who served the bank?
According to the bank’s website, almost half of the US tech and healthcare companies that went public last year after seed funding from venture capital firms were Silicon Valley Bank customers. The institution has also been associated with leading technology companies such as Shopify, ZipRecruiter and one of the leading venture capital firms Andreesson Horowitz.
“This event threatens startups with extinction. Hundreds of executives are asking how they can overcome this crisis. They are thinking about laying off workers,” said Harry Tan, CEO of Y Combinator, the startup behind Airbnb, DoorDash and Dropbox.
Tan says nearly a third of Y Combinator startups will be unable to pay salaries next month unless they have access to their money.
Among the affected customers is TV Internet provider Roku, which placed about 26% of its own cash, $487 million, with the bank. The company says its deposits were not insured and it is not clear “to what extent” they can be returned.
The Federal Deposit Insurance Corporation (FDIC) confiscated the assets of Silicon Valley Bank and placed them in a new bank, Deposit Insurance Bank in Santa Clara. On Monday, the institution was supposed to start paying deposits.
What caused the collapse?
Conceived in 1983 by Bill Biggerstaff and Robert Madiaris while playing poker, Silicon Valley Bank was the main financial conduit between the tech sector, startups, and tech industry workers. If a startup founder wanted to find new investors or go public, he developed a relationship with a bank.
Silicon Valley Bank used its generous capital from venture capital funds to invest in bonds, which were generating reliable returns thanks to low interest rates. Between 2018 and 2021, the bank’s deposits almost quadrupled, from $49 billion to $189.2 billion. However, last year’s Fed hike in interest rates destroyed that strategy.
The bank has been trying to introduce some precautionary measures this week – on Thursday, SVB announced plans to raise up to $1.75 billion. However, anxious customers began to actively withdraw funds, and the bank’s shares fell by 60%. After lunch on Friday, SVB stopped working without waiting for the end of the day.
The White House said Treasury Secretary Janet Yellen was “monitoring the situation closely.” The administration tried to reassure the public that the banking system was much healthier than it was during the Great Recession. Shares of Signature Bank and Western Alliance ended Friday down more than 20%, while PacWest Bancorp was down more than 35%. However, other major banks such as JPMorgan and Wells Fargo ended the week with slight gains. Bank of America and Morgan Stanley suffered minor losses.
“Our banking system is in a fundamentally different position than it was ten years ago. The reforms introduced then really provide the resilience we need,” said Cecilia Rouse, chair of the White House Council of Economic Advisers.
The financial crisis of 2008 began with the bankruptcy of large financial institutions in the United States and, since large banks had significant influence on each other, quickly grew into a global crisis – several European banks went bankrupt, various stock indices, stocks and commodity prices fell around the world, work lost millions of people.
Bill Tyler, CEO of TWG Supply in Grapevine, Texas, said he knew something wasn’t going according to plan when employees reported they hadn’t received their paycheck this morning:
“This is already late payment. This is already an awkward position. I don’t want to tell employees, “Hey, can you wait until the middle of next week to get paid?”
Silicon Valley Bank’s close ties to the technology sector have added to its problems. Tech stocks have been hit hard over the past 18 months after skyrocketing during the pandemic, and layoffs have spread across the industry. At the same time, the bank has been hit harder by the Fed’s fight against inflation – when the Fed raises its benchmark interest rate, the value of generally stable bonds starts to fall. This isn’t usually a problem, but when savers start withdrawing their money abruptly, banks sometimes have to sell these bonds to cover the outflow.
This is exactly what happened to Silicon Valley Bank, which had to sell $21 billion in highly liquid assets to cover sudden withdrawals. The damage from this sale amounted to $1.8 billion.
Will the funds be returned to investors?
On Sunday, US regulators announced that SVB clients will still have access to their funds.
“We are taking decisive action to protect the US economy by building public confidence in our banking system. Contributors will have access to all their money starting Monday, March 13th. There will be no loss to taxpayers from resolving the Silicon Valley Bank problem,” the FDIC, Treasury Department, and Federal Reserve said in a joint statement.
The Fed is also introducing a new lending facility that will provide additional funding to other similar institutions to ensure that “banks can meet the needs of all their depositors.”
The so-called Bank Term Financing Program will offer loans for up to one year to lenders, including T-bonds and other “qualified assets” that will be valued at par. The program will eliminate “the need for institutions to quickly sell securities in times of stress” and will be enough to cover all uninsured deposits in the US, the Fed said. The US Treasury allocated $25 billion to support the mechanism.
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Source: Techspot, Asahi, FT