Silicon Valley Bank, one of the top lenders to the technology sector, was shut down by regulators on Friday over concerns about its solvency.
The move triggered a sell-off in shares and raised fears that other banks could be at risk of bankruptcy.
This is how the crisis unfolded and what it means for the technology and financial sectors.
What is Silicon Valley Bank?
Founded in 1983, the bank grew to be the 16th largest in the US, with $210 billion in assets. Over the years, his client list reportedly grew to include some of the biggest names in consumer technology like Airbnb, Cisco, Fitbit, Pinterest, and Square.
Why was it closed?
On Wednesday night, SVB announced that it planned to raise $2 billion to «strengthen [its] financial position” after suffering losses amid the broader slowdown in the technology sector. He also stated that he had seen an increase in startup clients withdrawing their deposits. At the same time, the bank noted that its securities had lost value as a result of the higher interest rates.
On Thursday morning, SVB shares began to experience a sell-off.
Later that day, SVB CEO Gary Becker pleaded with tech investors to «keep calm.» He said the only danger SVB faced was if “everyone told each other that SVB is in trouble”.
That seems to have become a self-fulfilling prophecy, with tech titans like Peter Thiel. allegedly warning startup founders to reduce your exposure to SVB.
By the end of the day, SVB’s shares had fallen by 60%.
On Friday morning, CNBC reported that SVB had been unable to raise the cash it had hoped to raise and was looking for a buyer as deposit outflows continued to accelerate.
The bank even called the New York Police Department on Friday morning when customers began lining up outside its Park Avenue offices to get their money, but the officers who arrived on the scene left after determining that «no there was nothing criminal,» an NYPD spokesman said.
By noon on Friday, California’s state and federal banking regulators had seen enough and announced they would seize control of SVB’s deposits and place the bank in receivership.
According to the FDIC, this is the second largest bank failure in US history, behind the collapse of Washington Mutual in September 2008.
What happens next?
Before the shutdown, some bank analysts dismissed concerns about a possible «contagion» stemming from SVB’s problems that could destabilize the banking sector, although they did not rule out the possibility of the bank failing.
“We believe the liquidation was overdone as the big banks are much more liquid than smaller banks, are more diversified with broader business models, have a lot of capital, are much better managed with respect to risk, and have a lot of oversight from regulators. ,” JPMorgan analyst Vivek Juneja said in a note to clients on Friday.
Morgan Stanley analysts Manan Gosalia and Betsy Graseck echoed that sentiment, saying in a note Friday morning that the issues appeared «highly idiosyncratic and should not be seen as extrapolating to other banks we cover.»
“Yes, funding is a headwind for the industry,” they acknowledged, but stressed that they did not believe at the time that there was a liquidity crisis facing the banking sector.
Regulatory intervention at midday on Friday spooked investors and reversed a short-lived rally in the broader market, with the Dow Jones index falling 1.3% in afternoon trading, the S&P 1.7%. % and the tech-heavy Nasdaq more than 2%.
Brad Hargreaves, a startup founder who previously served on the boards of companies that did business with SVB, said the bank was unusual in that it often played a dual role as corporate and personal lender to chief executives.
Often, he said, SVB linked a company’s loan to an executive’s mortgage, and that a default on one would trigger a default on the other.
Silicon Valley Bank is to technology what Bank of America is to Main Street, he said, adding: «They really integrated into the lives of a lot of the founders.»
Many startup executives whose companies banked with SVBs are now likely to face a payroll crisis as well, Hargreaves said, because the FDIC is authorized to release only insured deposits up to $250,000. That increases the risk that these companies will announce furloughs or layoffs of tens or even hundreds of employees, he said.
SVB forwarded requests for comment on Friday to the FDIC’s takeover notice.
The FDIC said it is now working to determine how much of SVB’s deposits are insured up to its $250,000 limits. If you have a loan with the bank, you still need to make your payments.