This week, the bank for US tech startups quickly unraveled, leaving its powerful clients and investors in limbo.
It was the largest American bank failure since Washington Mutual in 2008.
Here’s what we know about the bank crash and what could happen next.
Founded in 1983, SVB specializes in banking technology start-ups. It has provided funding to nearly half of America’s VC-backed technology and healthcare companies.
Although SVB is relatively unknown outside of Silicon Valley, it was among the top 20 US commercial banks with total assets of $209 billion at the end of last year, according to the FDIC.
In short, SVB faced a classic bank run.
The longer version is a bit more complicated.
Several forces clashed to bring down the banker.
First, the Federal Reserve, which started raising interest rates a year ago to curb inflation. The Fed has acted aggressively, and higher borrowing costs have eroded momentum in tech stocks that have benefited the SVB.
Higher interest rates have also eroded the value of long-term bonds that SVB and other banks have swallowed up in an era of ultra-low, near-zero interest rates. SVB’s $21 billion bond portfolio was return on average 1.79% – The current yield on 10-year Treasury bonds is about 3.9%.
At the same time, venture capital began to dry up, forcing start-ups to use funds owned by SVB. So the bank sat on a mountain of unrealized bond losses while the rate of customer withdrawals picked up.
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On Wednesday, SVB announced that it had sold a bunch of securities at a loss and would also sell $2.25 billion in new shares to bolster its balance sheet. This caused panic among key venture capital firms, which reportedly advised companies withdraw your money from the bank.
The bank’s shares began to plummet on Thursday morning, and by lunchtime they were dragged along by shares of other banks, as investors began to fear a repeat of the financial crisis of 2007-2008.
By Friday morning, trading in SVB shares had ground to a halt and the company stopped trying to quickly raise capital or find a buyer. California regulators intervened, closing the bank and placing it under the control of the Federal Deposit Insurance Corporation.
Despite the initial panic on Wall Street, analysts believe that the collapse of the SVB is unlikely to trigger the domino effect that gripped the banking industry during the financial crisis.
“The system is as well capitalized and liquid as ever,” said Moody’s chief economist Mark Zandi. “The banks that are in trouble right now are too small to pose a serious threat to the entire system.”
No later than Monday morning, all insured depositors will have full access to their insured deposits, according to the FDIC. It will pay uninsured depositors “an upfront dividend within the next week.”
So while broader contagion is unlikely, smaller banks that are disproportionately tied to cash-strapped industries like technology and cryptocurrencies could struggle, according to Ed Moyi, senior market analyst at Oanda.
“Everyone on Wall Street knew that the Fed’s rate hike campaign was going to break something, and right now it’s leading to the collapse of small banks,” Moya said on Friday.
The FDIC typically sells the assets of a failed bank to other banks, using the proceeds to pay out depositors whose funds were not insured.
A buyer for SVB may still appear, although this is far from guaranteed.
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