Silicon Valley Bank was shut down by U.S. regulators on Friday after a rush to deposit outflows and a failed effort to raise new capital threw the future of the tech-focused lender into question.
With approximately $209 billion in assets, SVB became the second-largest bank failure in US history after the collapse of Washington Mutual in 2008, and marks a rapid fall from grace for a lender that was valued at more than $44 billion a year ago under 18 months.
The Federal Deposit Insurance Corporation, the US regulator that guarantees bank deposits up to $250,000, said it was closing SVB and insured depositors would have access to their funds by Monday.
Many of SVB’s clients were venture capital funds as well as tech and healthcare start-ups, and reportedly had account balances well above the FDIC’s maximum insured amount. The regulator said those depositors would receive an initial payment next week and the rest would depend on what happens to SVB’s assets.
The regulator has always sought to merge failing lenders with a larger, more stable institution. Washington Mutual, for example, was sold to JPMorgan Chase. The FDIC said it would use proceeds from the sale of SVB to fund payments to larger depositors.
SVB’s bond prices plunged on Friday, with its senior debt trading at around 45 cents on the dollar and its junior debt as low as 12.5 cents, suggesting bondholders are prepared for heavy losses.
Earlier on Friday, the SVB had abandoned their efforts raise $2.25 billion in new funding to cover losses on its bond portfolio and had begun looking for a buyer to save it, according to people familiar with the efforts.
SVB shares were halted in early trading on the Nasdaq New York stock exchange, and its woes have affected the shares of several other US banks that appear to have similar depositor and funding profiles.
Trades on PacWest, Western Alliance and First Republic were halted due to volatility after all initially falling 40-50%. Trading was also briefly halted at Signature Bank after its shares fell nearly 30%. Several of these banks sought to reassure the market by issuing statements highlighting their differences with SVB in terms of assets and depositor base.
THE the setbacks of the banking group stem from a decision made at the height of the tech boom to park $91 billion of its deposits in long-term securities such as mortgage bonds and U.S. Treasuries, which were considered safe but are now worth $15 billion. dollars less than when SVB bought them after the Federal Reserve raised interest rates aggressively.
This has planned to sell $1.25 billion of its common stock to investors and an additional $500 million of mandatory convertible preferred stock, which is slightly less dilutive for existing shareholders. This would have helped offset losses of about $1.8 billion that SVB incurred from selling about $21 billion of insider securities to cover customers withdrawing deposits.
On Thursday, SVB and its underwriter Goldman Sachs rushed to finalize the share offering. With Goldman securing enough interest in the convertible bond deal by mid-afternoon, the common stock sale struggled as SVB shares slid, according to a person familiar with the efforts. Private equity firm General Atlantic had also pledged to provide $500 million in equity if the offer went through.
Shares of the bank posted their biggest drop on Thursday, wiping $9.6 billion off its market capitalization. Shares of SVB had fallen more than 60% in premarket trading on Friday before trading halted.
US bank failures have been extremely rare in recent years; the last FDIC-insured bank to close was in October 2020, and the last time there were more than 10 was 2014.
SVB’s collapse came two days after Silvergate, a San Diego-based bank that dealt with the crypto industry, said it would volunteer relax after customers withdrew billions of dollars.
The ramifications of SVB problems can be widely felt. The lender is the banking partner for half of America’s venture capital-backed tech and life sciences companies, and has a strong presence in providing $10 billion private equity industry lines of credit. dollars.
Its customers had grown increasingly fearful of the bank’s financial situation on Thursday, when some start-ups began withdrawing their money. Some venture capital groups have acknowledged that they began advising some of their holding companies to consider withdrawing some of their deposits from the lender earlier this week.
“SVB’s 40-year business relationship supporting Silicon Valley evaporated in 14 hours,” said a senior executive at a multibillion-dollar venture capital fund.
Reporting by Joshua Franklin, Eric Platt, Ortenca Aliaj, Antoine Gara and Brooke Masters in New York and Tabby Kinder and George Hammond in San Francisco. Additional reporting by Stephen Gandel in New York and Robert Smith in London