Silicon Valley Bank fails in largest bank collapse since 2008 crisis

US regulators rushed to seize the assets of top tech lender Silicon Valley Bank on Friday after a run on the bank, marking the largest failure of such an institution since the height of the financial crisis more than a decade ago.

Silicon Valley Bank (SVB), the nation’s 16th largest bank, failed after depositors – mostly technology workers and venture capital-backed companies – hurried to withdraw their money this week as anxiety over the bank’s situation spread.

Global institutions including the Bank of England are monitoring the situation closely amid concerns that the turmoil could put customers’ deposits at risk and lead to further panic across the financial system.

“Fear is contagious,” said Angela Lee, a Columbia Business School professor of venture capitalism. “Bank runs can start on a rumor and this is much bigger than a rumor. I worry about folks overreacting to this and overcorrecting.”

SVB had prompted a global sell-off in banking stocks after it launched a rescue share sale to plug a near-$2bn (£1.7bn) hole in its finances.

The bank lost the funds when it sold a portfolio of bonds in response to a decline in customer deposits. Those bonds had dropped in value as a result of rising interest rates, leaving SVB with a shortfall.

Its US-listed shares initially plunged 60% on Thursday, and were halted on Friday after tumbling 66% in pre-market trading, before regulators stepped in.

The troubles facing SVB were relatively unique – given it serves startups in the tech sector, for which funding has dried up in recent months. Silicon Valley was heavily exposed to the tech industry and there is little chance of contagion in the banking sector similar to the chaos in the months leading up to the recession more than a decade ago. The biggest banks – those most likely to cause a systemic economic issue – have healthy balance sheets and plenty of capital.

However, those troubles raised broader fears that the recent increases in interest rates have affected the value of other banks’ bond portfolios, which tend to fall in price when interest rates rise.

There were concerns about how that could affect lenders’ capital levels, which are meant to offset riskier parts of banks’ balance sheets. Those fears prompted a drop in UK banking stocks, which the Bank of England’s regulatory arm, the Prudential Regulation Authority (PRA), is closely monitoring.

The Guardian understands the PRA is keeping an eye on market movements, and is speaking with firms it supervises – including high street banks such as Barclays, NatWest and Lloyds Banking Group – amid fears there could be further contagion from market jitters over the turmoil affecting SVB.

However, it is understood that the PRA believes that the UK banks it monitors are resilient, given that bond values are usually part of annual stress testing, and that most have seen their income rise as a result of higher interest rates in recent months.

It was not immediately clear what the implications for SVB’s UK operations would be, though its roughly 3,500 customers were understood to have been pulling deposits in light of the turmoil. That is despite the subsidiary having assured that its operations were “ringfenced” from the US parent firm, and that clients’ deposits were protected up to £85,000 by the Financial Services Compensation Scheme.

A Bank of England spokesperson said: “Silicon Valley Bank UK is supervised and authorised by the Prudential Regulation Authority. The UK bank has no personal retail depositors. We are aware of the issues impacting the firm and are closely engaging with it and overseas regulators.”

However, the troubles have raised broader fears that the recent increases in US interest rates have affected the value of other banks’ bond portfolios, which tend to fall in price when interest rates rise. The collapse of Silicon Valley pushed shares of almost all financial institutions lower on Friday.

Silicon Valley Bank’s failure arrived with incredible speed, with some industry analysts on Friday suggesting it was a good company and still probably a wise investment. Silicon Valley Bank executives were trying to raise capital early Friday and find additional investors. However, trading in the bank’s shares was halted before the opening bell due to extreme volatility.

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Shortly before noon ET, the Federal Deposit Insurance Corporation moved to shutter the bank. Notably, the FDIC did not wait until the close of business to seize the bank, as is typical in an orderly wind down of a financial institution. The FDIC could not immediately find a buyer for the bank’s assets, signaling how fast depositors had cashed out. The bank’s remaining uninsured deposits will now be locked up in receivership.

Santa Clara Police officers exit Silicon Valley Bank in Santa Clara, California.
Santa Clara police officers exit Silicon Valley Bank in Santa Clara, California. Photograph: Jeff Chiu/AP

The bank had $209bn in total assets at the time of failure, the FDIC said. It was unclear how much of its deposits were above the $250,000 insurance limit at the moment, but previous regulatory reports showed that much of Silicon Valley Bank’s deposits exceeded that limit.

As its name implied, Silicon Valley Bank was a major financial conduit between the technology sector, its founders and startups as well as its workers. Hundreds of companies held their operating capital with the bank, and it was seen as good business sense to develop a relationship with Silicon Valley Bank if a founder wanted to find new investors or go public.

“We saw building a relationship with Silicon Valley Bank as a logical step, given their reach,” said Ashley Tyrner, CEO of FarmboxRx, a company that delivers food and medicine to Medicaid and Medicare recipients. While Tyrner has money in other banks and can make payroll, she said a good portion of her business’s profits were now locked up with the bank.

But Silicon Valley’s connections to the tech sector became a liability rapidly. Technology stocks have been hit hard in the past 18 months after a growth surge during the pandemic and layoffs have spread throughout the industry.

Tyrner said she had spoken to several friends who are backed by venture capital. She described those friends as being “beside themselves” over the bank’s failure. Tyrner’s chief operating officer tried to withdraw her company’s funds on Thursday, but failed to do so in time.

“One friend said they couldn’t make payroll today and cried when they had to inform 200 employees because of this issue,” Tyrner said.

While the SVB meltdown is unlikely to have a major impact outside of tech, it is going to be “catastrophic” for startups, Columbia professor Lee said, and the broader Silicon Valley atmosphere.

“Startups are not able to access their funds and companies are going to go out of business to cover this,” she said. “The sentiment coming out of this is going to be devastating globally.”

The Associated Press contributed reporting


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