Silicon Valley Bank was shut down by US regulators on Friday after a flurry of deposit outflows and a failed effort to raise new capital cast doubt on the future of the tech-focused lender.
With around $209 billion in assets, SVB has become the second largest bank failure in US history after the collapse of Washington Mutual in 2008, and marks a rapid fall from grace for a lender that was valued by more than $44 billion less than 18 months ago. .
The Federal Deposit Insurance Corporation, the US regulator that guarantees bank deposits of up to $250,000, said it was shutting down SVB and insured depositors would have access to their funds on Monday.
Many of SVB’s clients were venture capital funds, as well as technology and healthcare startups, and had account balances well in excess of the FDIC’s maximum insured amount. The regulator said these depositors would receive an initial payment next week and the rest would depend on what happens to SVB’s assets.
Historically, the regulator has sought to merge failed lenders with a larger, more stable institution. Washington Mutual, for example, was sold to JPMorgan Chase. The FDIC said it would use the proceeds from the SVB sale to fund payments to larger depositors.
SVB’s bond prices plunged on Friday, with its senior debt trading around 45 cents on the dollar and its junior debt as low as 12.5 cents, suggesting that bondholders are preparing for big losses.
Earlier on Friday, SVB had abandoned efforts to raise $2.25 billion in new funds to cover losses on its bond portfolio and had begun looking for a buyer to save it, according to people with knowledge of the efforts.
SVB’s shares were halted during early trading on New York’s Nasdaq stock exchange, and its troubles affected shares of several other US banks believed to have similar deposit and funding profiles.
Trading in Pacific West, Western Alliance and First Republic halted due to volatility after all initially fell 40 to 50 percent. Trading also halted briefly at Signature Bank after its shares fell nearly 30 percent. Several of those banks tried to reassure the market by publishing statements highlighting their differences from SVB in terms of assets and depositor base.
The banking group’s woes stem from a decision made at the height of the tech boom to park $91 billion of its deposits in long-term securities such as US mortgage bonds and Treasuries, which were considered safe but they are now worth $15 billion less than when SVB bought them after the Federal Reserve aggressively raised interest rates.
It had planned to sell $1.25 billion of its common shares to investors and an additional $500 million of mandatory convertible preferred shares, which dilute existing shareholders slightly less. That would have helped save the roughly $1.8 billion in losses SVB incurred from the sale of about $21 billion of securities initiated to cover customer deposit withdrawals.
On Thursday, SVB and its underwriter Goldman Sachs rushed to complete the share offering. While Goldman had secured enough interest in the convertible bond deal by midafternoon, the sale of common shares was struggling as SVB shares fell, according to a person with knowledge of the efforts. Private equity firm General Atlantic had also pledged to provide $500 million in capital if the offer was completed.
The bank’s shares posted their biggest drop on Thursday, wiping $9.6 billion off their market capitalization. SVB shares had fallen more than 60 percent in pre-market trading on Friday before trading was suspended.
US bank failures have been extremely rare in recent years; the last FDIC-insured bank to close was in October 2020, and the last time there were more than 10 was in 2014.
The ramifications of BLS problems can be widely felt. The lender is the banking partner for half of America’s VC-backed life sciences and technology companies and is heavily involved in offering lines of credit to the $10 trillion private equity industry.
Its clients had grown increasingly fearful for the bank’s financial position on Thursday as some startups began pulling out their cash. Some venture capital groups acknowledged that they had begun advising some of their portfolio companies to consider withdrawing a portion of their deposits from the lender earlier this week.
“SVB’s 40 years of business relationships supporting Silicon Valley evaporated in 14 hours,” said a top executive at a multibillion-dollar venture capital fund.
Reporting by Joshua Franklin, Eric Platt, Ortenca Aliaj, Antoine Gara and Brooke Masters in New York and Tabby Kinder and George Hammond in San Francisco. Additional reporting by Stephen Gandel in New York and Robert Smith in London.
© 2023 The Financial Times Ltd. All rights reserved. It must not be redistributed, copied or modified in any way.
Tech – Ars Technica