Silicon Valley Bank Fails After Deposit Run

One of the tech startup world’s most prominent lenders, struggling under the weight of ill-fated decisions and panicked clients, collapsed on Friday, forcing the federal government to step in.

The Federal Deposit Insurance Corporation said Friday that it will acquire Silicon Valley Bank, a 40-year-old institution headquartered in Santa Clara, California. The bank’s failure is the second largest in US history, and the largest since the 2008 financial crisis.

The move put nearly $175 billion in customer deposits under the regulator’s control. While the rapid collapse of the country’s 16th largest bank evoked memories of the global financial panic a decade and a half ago, it did not immediately spark fears of widespread destruction in the financial industry or the global economy.

The failure of the Silicon Valley bank came two days after its emergency moves to deal with withdrawal requests and the sharp drop in the value of its investment holdings that shocked Wall Street and depositors, causing its shares to fluctuate. The bank, which had $209 billion in assets at the end of 2022, said a person familiar with the negotiations said it had been working with financial advisors through Friday morning to find a buyer.

While the problems the Silicon Valley bank is facing are unique, the financial contagion appeared to be spreading through parts of the banking sector, prompting Treasury Secretary Janet Yellen to publicly reassure investors that the banking system was resilient.

Investors have dumped shares of Silicon Valley bank peers, including First Republic, Signature Bank and Western Alliance, many of which cater to entry-level clients and have similar investment portfolios.

Trading in shares of at least five banks was halted repeatedly throughout the day as sharp declines brought the stock market to the limits.

By comparison, some of the country’s largest banks seemed more insulated from the fallout. After falling on Thursday, JPMorgan, Wells Fargo and Citigroup stocks were generally flat on Friday.

That’s because the biggest banks operate in an entirely different world. Their capital requirements are more stringent and they also have much broader deposit rules than banks like Silicon Valley, which don’t attract masses of retail customers. Regulators have also tried to prevent major banks from concentrating too tightly in one area of ​​business, and have largely shied away from riskier assets like cryptocurrencies.

“I don’t think that’s an issue for the big banks — that’s the good news, they’re diversified,” said Sheila Beer, former FDIC president, Ms. Beer. Even in exchange for the safest form of government debt, they must be expected to have plenty of liquidity.

On Friday, Ms. Yellen discussed issues surrounding the Silicon Valley bank with banking regulators, according to a statement from the Treasury Department.

Representatives from the Federal Reserve and the FDIC also held a bipartisan briefing for members of Congress organized by Maxine Waters, a California Democrat and ranking member of the House Financial Services Committee, according to a person familiar with the matter.

Silicon Valley bank’s downward spiral has accelerated with dizzying speed this week, but its troubles have been brewing for more than a year. Founded in 1983, the bank has long been a major lender to startup companies and their executives.

Although the bank advertises itself as a “Partner in the Innovation Economy,” some old decisions certainly led to this moment.

Cash flowing in from high-performance startups that raised a lot of money from venture capitalists, the Silicon Valley bank did what all banks do: keep a small portion of the deposit on hand and invest the rest in hopes of making a return. In particular, the bank placed a large share of customer deposits in long-term Treasury and mortgage bonds that promised modest and steady returns when interest rates were low.

It has worked fine for years. The bank’s deposits doubled to $102 billion at the end of 2020 from $49 billion in 2018. One year later, in 2021, it had $189.2 billion in its coffers as startups and tech companies enjoyed high profits during the pandemic.

But it bought huge amounts of bonds before the Fed started raising interest rates just over a year ago, and then failed to make provisions for the prospect of interest rates rising too quickly. As interest rates rise, those holdings become less attractive because new government bonds pay more interest.

This may not matter as long as the bank’s customers have not requested a refund. But because financing for startups was slowing at the same time that interest rates were rising, bank customers began withdrawing more of their money.

To pay for these redemption requests, the Silicon Valley bank sold off some of its investments. In a surprising disclosure on Wednesday, the bank admitted it lost nearly $2 billion when it had to sell some of its holdings.

“It’s a classic Jimmy Stewart problem,” said Ms. Baer, ​​referring to the actor who played a banker trying to fend off bank runs in It’s a Wonderful Life. “If everyone starts withdrawing money at once, the bank has to start selling some of its assets to get the money back to depositors.”

These concerns sparked investor concerns about some regional banks. Like Silicon Valley Bank, Signature Bank is also a lender that caters to the startup community. She is perhaps best known for her relationships with former President Donald J. Trump and his family.

First Republic Bank, a San Francisco-based lender focused on wealth management and private banking for high-net-worth clients in the tech industry, recently warned that its ability to turn a profit is being hampered by rising interest rates. Its Phoenix counterpart in the wealth management industry, Western Alliance Bank, is facing similar pressures.

Separately, another bank, Silvergate, He said on Wednesday that it was going to close its operations and liquidate it after it incurred huge losses from its exposure to the cryptocurrency industry.

A First Republic spokesperson responded to a request for comment by sharing a filing the bank filed with the Securities and Exchange Commission on Friday showing that its deposit base is “strong and very well diversified” and that its “liquidity position remains very strong.”

A spokeswoman for the Western alliance referred to a press release issued by the bank on Friday describing the state of its balance sheet. “Deposits remain strong,” the statement said. “Asset quality remains excellent.”

Representatives for Signature and Silicon Valley Bank had no comment. Representatives for the Federal Reserve and the FDIC declined to comment.

Some banking experts noted Friday that a large bank like Silicon Valley could have managed its interest rate risk better if parts of the Dodd-Frank financial regulatory package, put in place after the 2008 crisis, had not been rolled back under President. trump.

In 2018, Mr. Trump signed a bill that reduces regulatory scrutiny of several regional banks. Silicon Valley Bank CEO Greg Baker was a strong supporter of the change, which removed a requirement that banks with less than $250 billion in assets be subject to stress testing by the Federal Reserve, and changed requirements for how much cash they had to hold in their accounts. Budgets to protect against shocks.

At the end of 2016, Silicon Valley Bank had $45 billion in assets. It jumped to more than $115 billion by the end of 2020.

Friday’s turmoil drew disturbing parallels to the 2008 financial crisis. Although it’s not uncommon for small banks to fail, the last time a bank of this size broke up was in 2008, when the Washington Federal Deposit Insurance Corporation took over. Mutual.

The FDIC rarely takes over banks when the markets are open, preferring to put a failing institution into receivership on Friday after business closes for the weekend. But the banking regulator issued a press release in the first few hours of trading on Friday, saying it had set up a new bank, the National Bank of Santa Clara, to hold deposits and other assets of the failed bank.

The regulator said the new entity would be operational by Monday and checks issued by the old bank would continue to clear. While customers with deposits of up to $250,000—the maximum covered by FDIC insurance—will be made full, there is no guarantee that depositors with larger amounts in their accounts will get all of their money back.

These customers will be given certificates for their uninsured money, meaning they’ll be among the first in line to be paid back with refunds while the FDIC keeps the Silicon Valley bank in receivership — though they may not get all of their money back.

When the California bank IndyMac failed in July 2008, it didn’t have an immediate buyer, like the Silicon Valley bank. The FDIC held IndyMac in receivership until March 2009, and the large depositors eventually got only 50 percent of their uninsured funds back. When Washington Mutual was acquired by JPMorgan Chase, they became full account holders.

Maureen Farrell And Joe Rennison Contribute to the preparation of reports.