Silicon Valley Bank collapses after failing to raise capital
New York (CNN) Silicon Valley Bank collapsed Friday morning after a staggering 48 hours in which its capital crisis sparked fears of a meltdown across the banking industry.
Its failure marks the largest shutdown of a US bank since 2008, when Washington Mutual collapsed during the financial crisis.
California regulators shut down the tech lender and gave it control of the US Federal Deposit Insurance Corporation. The FDIC acts as the receiver, which usually means liquidating the bank’s assets to repay its customers, including depositors and creditors. The FDIC is an independent government agency that insures bank deposits and oversees financial institutions.
The FDIC said all insured depositors will have full access to their insured deposits no later than Monday morning, and it will pay uninsured depositors an “advance dividend” within the next week.
The bank, previously owned by SVB Financial Group, did not respond to CNN’s request for comment.
The stock plummets on the second day
Although relatively unknown outside of Silicon Valley, SVB was among the top 20 American commercial banks with total assets of $209 billion at the end of last year, according to the FDIC.
But the SVB was primarily aimed at riskier tech startups, which have been hit lately by higher interest rates and dwindling venture capital.
The bank partnered with nearly half of all venture-backed technology and healthcare companies in the United States, many of which withdrew deposits from the bank.
SVB shares were halted on Friday morning after falling more than 60% in premarket trading. The stock plunged 60% on Thursday after the bank said it had to close a portfolio of $1.75 billion worth of U.S. Treasuries and stocks.
Several other bank stocks were temporarily halted on Friday, including First Republic, PacWest Bancorp and Signature Bank.
When bank stocks fell worldwide in response to the SVB crisis on Thursday, contagion fears spread across Wall Street. Hedge fund manager Bill Ackman compared the situation at SVB to the final days of Bear Stearns, the first bank to collapse at the start of the 2007-2008 global financial crisis.
“The risk of failure and lost deposits here is that the next least capitalized bank takes a run and fails and the dominoes keep falling,” Ackman wrote in a series of tweets.
On Friday, the panic seemed to subside for many. Bank stocks remained largely negative but stable.
Wells Fargo senior bank analyst Mike Mayo said the crisis at SVB could be “a idiosyncratic situation”.
“This is day and night compared to the global financial crisis of 15 years ago,” he told CNN’s Julia Chatterly on Friday. Back then, he said, “banks were taking excessive risks and people thought everything was fine. Now everyone is concerned, but beneath the surface banks are more resilient than they have been in a generation.”
Rate hikes take a bite
SVB’s sudden crash echoed other risky bets uncovered in last year’s market turmoil.
Crypto-focused lender Silvergate announced on Wednesday that it is winding up operations and liquidating the bank after it was financially hit by the digital asset turmoil. Signature Bank, another crypto-friendly lender, was hit hard by the bank sell-off, with shares plunging 30% before being halted on Friday due to volatility.
“The institutional challenges facing SVB reflect a larger and more pervasive systemic problem: the banking industry is sitting on a ton of underperforming assets that, thanks to last year’s rate hikes, are now well under water – and sinking,” wrote Konrad Alt, co-founder of Klaros Group .
Alt estimated that rate hikes “have effectively wiped out about 28% of all capital in the banking industry by the end of 2022.”
When interest rates were near zero, banks bought long-dated, low-risk government bonds. But while the Fed is raising interest rates to fight inflation, the value of these assets has fallen, leaving banks with unrealized losses.
— CNN’s Matt Egan contributed to this report