Silicon Valley Bank collapses after failing to raise capital

New York (CNN) Silicon Valley Bank collapsed on Friday morning after a stunning 48 hours in which a bank run and capital crisis led to the second-largest failure of a financial institution in US history.

California regulators shut down the tech lender and placed it under the control of the US Federal Deposit Insurance Corporation. The FDIC acts as receiver, which usually means it will liquidate the bank’s assets to pay back customers, including depositors and creditors.

The FDIC, an independent government agency that insures bank deposits and oversees financial institutions, said all insured depositors will have full access to their insured deposits by Monday morning. It said it would pay uninsured depositors an “advance dividend within the next week.”

The bank, formerly owned by SVB Financial Group, did not respond to CNN’s request for comment.

What happened?

The wheels began to come off on Wednesday, when SBV announced it had sold a bunch of securities at a loss and would sell $2.25 billion in new shares to shore up its balance sheet. That sparked panic among key venture capital firms, which reportedly advised companies to withdraw their money from the bank.

The company’s shares cratered on Thursday, dragging other banks down with it. On Friday morning, SBV’s shares were halted and they had abandoned efforts to quickly raise capital or find a buyer. Several other bank stocks were suspended Friday, including First Republic, PacWest Bancorp and Signature Bank.

The timing of the FDIC’s mid-morning takeover was notable, as the agency typically waits until the market has closed to intervene.

“SVB’s condition deteriorated so rapidly that it could not last just five more hours,” wrote Better Markets CEO Dennis M. Kelleher. “It’s because depositors withdrew their money so quickly that the bank was insolvent, and an intraday shutdown was inevitable due to a classic bank run.”

Silicon Valley Bank’s decline stems in part from the Federal Reserve’s aggressive rate hikes over the past year.

When interest rates were close to zero, banks loaded up on long-dated, seemingly low-risk government bonds. But as the Fed raises interest rates to fight inflation, the value of those assets has fallen, and banks are sitting on unrealized losses.

Higher prices are hitting technology particularly hard, undercutting the value of tech stocks and making it difficult to raise money, Moody’s chief economist Mark Zandi said. This caused many technology companies to withdraw the deposits they had with SVB to finance their operations.

“Higher interest rates have also lowered the value of their treasury and other securities that SVB needed to pay depositors,” Zandi said. “All of this set off the run on their deposits that forced the FDIC to take over SVB.”

Deputy Finance Minister Wally Adeyemo on Friday sought to reassure the public about the health of the banking system following SVB’s sudden collapse.

“Federal regulators are paying attention to this particular financial institution, and when we think about the broader financial system, we are very confident in the ability and resilience of the system,” Adeyemo told CNN in an exclusive interview.

The comments come after Treasury Secretary Janet Yellen called an unscheduled meeting with financial regulators to discuss the implosion of Silicon Valley Bank, a major lender to the battered technology sector.

– We have the tools that are necessary [deal with] events like what has happened with Silicon Valley Bank,” Adeyemo said.

Adeyemo said US officials are “learning more information” about the collapse of Silicon Valley Bank. He argued that the Dodd-Frank financial reform, which was signed into law in 2010, has given regulators the tools they need to deal with this and improved the capitalization of banks.

Adeyemo declined to predict what, if any, impact that will have on the broader economy or the technology industry.

Echoes from 2008

Despite initial panic on Wall Street over the run on SVB, which sent shares cratering, analysts said the bank’s collapse is unlikely to trigger the kind of domino effect that gripped the banking industry during the financial crisis.

“The system is as well capitalized and liquid as it’s ever been,” Zandi said. “The banks now in trouble are far too small to be a meaningful threat to the wider system.”

But smaller banks that are disproportionately tied to cash-heavy industries like technology and crypto could be in for a tough ride, according to Ed Moya, senior market analyst at Oanda.

“Everybody on Wall Street knew that eventually the Fed’s rate hike campaign would break something, and right now it’s taking down small banks,” Moya said.

“Idiosyncratic Situation”

Although relatively unknown outside Silicon Valley, SVB was among the top 20 U.S. commercial banks, with $209 billion in total assets at the end of last year, according to the FDIC.

It is the largest lender to fail since Washington Mutual collapsed in 2008.

The bank partnered with almost half of all venture-backed technology and healthcare companies in the US, many of which drew deposits from the bank.

Mike Mayo, senior banking analyst at Wells Fargo, said the crisis at SVB may be “an idiosyncratic situation.”

“This is night and day versus the global financial crisis of 15 years ago,” he told CNN’s Julia Chatterly on Friday. Back then, he said, “banks took excessive risks and people thought everything was fine. Now everyone is worried, but underneath the surface banks are more resilient than they have been in a generation.”

Price increases take a bite

SVB’s sudden fall mirrored other risky bets that have been exposed in the past year’s market turmoil.

Crypto-focused lender Silvergate said Wednesday it is winding down operations and will liquidate the bank after being hit financially by digital asset turmoil. Signature Bank, another lender, was hit hard by the bank sell-off, with shares plunging 30% before being halted on volatility on Friday.

“SVB’s institutional challenges reflect a larger and more widespread systemic problem: The banking industry is sitting on a lot of low-yielding assets that, thanks to the last year of rate hikes, are now well below water – and sinking,” wrote Konrad Alt. co-founder of Klaros Group.

Alt estimated that rate hikes “have effectively wiped out about 28% of all capital in the banking industry by the end of 2022.”