The bank went bankrupt after depositors — mostly tech workers and venture capitalist-backed companies — created a race against it.
The Federal Deposit Insurance Corporation on Friday seized the assets of Silicon Valley Bank, marking the largest bank failure since Washington Mutual at the height of the 2008 financial crisis.
The bank went bankrupt after depositors, mostly tech workers and venture capitalist-backed companies, began withdrawing their money, creating a run on the bank.
Silicon Valley was heavily exposed to the tech industry and there is little chance of contagion in the banking sector as was the case in the months leading up to the Great Recession more than a decade ago. Large banks have sufficient capital to avoid a similar situation.
The FDIC ordered the shutdown of Silicon Valley Bank and immediately took possession of all deposits at the bank on Friday. The bank had $209 billion in assets and $175.4 billion in deposits at the time of bankruptcy, the FDIC said in a statement. It was unclear how many deposits exceeded the $250,000 insurance limit at this time.
Notably, the FDIC has not announced a buyer of the Silicon Valley assets, which is usually the case when there is an orderly liquidation of a bank. The FDIC also seized the bank’s assets in the middle of the business day, a sign of the seriousness of the situation.
Silicon Valley Bank’s financial health came under increasing question this week after the bank announced plans to raise up to $1.75 billion to bolster its capital position amid a concerns about rising interest rates and the economy. Shares of SVB Financial Group, the parent company of Silicon Valley Bank, had fallen nearly 70% before trading was halted before the Nasdaq opening bell.
CNBC reported that attempts to raise capital had failed and the bank was now looking to sell itself.
As the 16th largest bank in the country, the Silicon Valley bank is no small. It acts as a major financial conduit for venture capital-backed (VC-backed) companies, which have been hit hard over the past 18 months as the Federal Reserve raised interest rates and made riskier tech assets less attractive to investors.
Venture-backed companies would have been asked to withdraw at least two months of “burnt” cash from Silicon Valley Bank to cover their expenses. Typically, venture capital-backed companies are not profitable, and how quickly they use up the cash they need to run their business – their so-called “burn rate” – is a generally important metric for Investors.
Shares of diversified banks like Bank of America and JPMorgan emerged from an early slump on Friday’s data from the Labor Department that showed wage gains slowed in February. But regional banks, especially those heavily exposed to the tech industry, were in decline.
Either way, it’s been a killer week. Shares of major banks are down this week between 7% and 12%.
Treasury Secretary Janet Yellen told Capitol Hill lawmakers on Friday that the department is aware of recent developments and is monitoring the situation, calling it a “matter of concern” when banks suffer losses, according to CNBC.
US regulators were seen arriving at the bank’s California offices on Friday, Bloomberg News reported.
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