Silicon Valley Bank: Regulators Take Over as Failure Raises Fears

US regulators have shut down Silicon Valley Bank (SVB) and taken control of customer deposits in the biggest failure of a US bank since 2008.

Its problems led to a rush of customer withdrawals and sparked fears about the state of the banking sector.

Officials said they acted to “protect insured depositors”.

Silicon Valley Bank was facing “lack of liquidity and insolvency”, banking regulators in California, where the firm is headquartered, said when they announced the takeover.

The Federal Deposit Insurance Corporation (FDIC), which normally protects deposits of up to $250,000, said it had taken over the deposits of about $175bn (£145bn) at the bank, the 16th largest in the US.

Bank branches will reopen and customers with insured deposits will have access to funds “by Monday morning at the latest,” it said, adding that money raised from the sale of the bank’s assets would go to uninsured depositors.

With many of the firm’s clients in that position, the situation has left many companies with money tied up in the bank worried about the future.

“I’m on my way to the branch to find my money right now. Tried to transfer it yesterday, didn’t work. You know those moments where you can be really screwed but you’re not sure? This is one of those moments,” a startup founder told the BBC.

Another founder of a health care startup said, “Literally three days ago we hit a million dollars in our bank account… And then this happens.”

He managed to get the money linked to another account 40 minutes before the deadline. “It was on hold. And then this morning it was there. But I know others who did the same thing minutes after me, and it hasn’t transferred.”

“It was a crazy situation,” he said.

The collapse came after SVB said it was trying to raise $2.25bn (£1.9bn) to cover a loss caused by the sale of assets, mainly US Treasuries, which had been hit by higher interest rates.

The news caused investors and customers to flee the bank. Shares saw their biggest one-day drop ever on Thursday, falling more than 60% and falling further in after-hours trading before trading was halted.

Concerns that other banks may face similar problems led to a widespread sell-off in bank stocks globally on Thursday and early Friday.

In a speech in Washington on Friday, US Treasury Secretary Janet Yellen said she is monitoring “the latest developments” at Silicon Valley Bank and others “very carefully”.

She later met with top banking regulators, where the Treasury said she expressed “full confidence that banking regulators are taking appropriate action in response and noted that the banking system remains resilient”.

SVB has not responded to a request for comment.

The company is an important lender to early-stage businesses, and is the banking partner for almost half of US venture-backed technology and healthcare companies that listed on the stock exchanges last year.

The firm, which began as a California bank in 1983, expanded rapidly over the past decade. It now employs more than 8,500 people globally, although most of its operations are in the United States.

But the bank has been under pressure, as higher interest rates make it harder for start-ups to raise money through private fundraising or share sales, and more customers pulled deposits, moves that snowballed this week.

In Silicon Valley, the fallout from the collapse was widespread as companies faced questions about what the collapse meant for their finances.

Even businesses without direct operations were affected, such as customers of Rippling, a company that handles payroll software and had used SVB. It warned that current payments could be subject to delays and said it was switching operations to another bank.

SVB’s UK subsidiary said it will be placed into insolvency from Sunday evening.

The Bank of England said Silicon Valley Bank UK would stop making payments or accepting deposits in the meantime, and the move will allow individual depositors to be paid up to £85,000 from the UK’s deposit insurance scheme.

“SVBUK has a limited presence in the UK and no critical functions supporting the financial system,” the BoE added.

As well as being a major blow to the technology industry, the collapse of SVB has raised concerns about the wider risks facing banks, as rapid rises in interest rates hit bond markets.

Central banks around the world – including the US Federal Reserve and the Bank of England – have sharply increased borrowing costs over the past year as they try to curb inflation.

But as prices rise, the value of existing bond portfolios typically declines.

These falls mean that many banks are sitting on significant potential losses – although the change in value will not usually be a problem unless other pressures force the firms to sell their holdings.

Shares in some major U.S. banks recovered on Friday, but the selloff continued to hit smaller firms, forcing a trading halt for names like Signature Bank and others.

The tech-heavy Nasdaq ended the day down 1.7%, while the S&P 500 fell 1.4% and the Dow closed 1% lower.

Major European and Asian indices also closed lower, with the FTSE 100 down 1.6%.

Alexander Yokum, an equity analyst at CFRA, said banks that specialize in single industries are seen as vulnerable to rapid withdrawals, such as the one that hit SVB.

“Silicon Valley Bank wouldn’t have lost money if they hadn’t run out of money to give back to their customers,” he said. “The problem was that people wanted money and they didn’t have it – they had invested and those investments were down.”

“I know there’s a lot of fear, but it’s definitely company-specific,” he said.

“The average Joe should be fine,” he added, but he said tech firms are likely to find it even more difficult to raise money. “It’s not good,” he said.