Major US Tech Lender Silicon Valley Bank Closed, Here Is What Led To The Crisis

The closing of SVB is seen as the largest bank failure since Washington Mutual during the height of the 2008 financial crisis

Silicon Valley Bank (SVB), a major US lender for venture capital-backed companies, was seized by California banking regulators on Friday. The Federal Deposit Insurance Corporation (FDIC) in its order said that the move is aimed “to protect insured depositors”.

The closing of SVB is seen as the largest bank failure since Washington Mutual during the height of the 2008 financial crisis. According to a report by Associated Press (AP), the bank failed after depositors, mostly technology workers and venture capital-backed companies, began withdrawing their money from the bank.

The FDIC ordered the closure of Silicon Valley Bank and immediately took the possession of all deposits at the bank Friday. “To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB). At the time of closing, the FDIC as receiver immediately transferred to the DINB all insured deposits of Silicon Valley Bank,” the order read. 

It added: "All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors."

According to the FDIC, as of December 31, 2022, the Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits.

What Led To SVB Closure?

With $210 billion in assets, the Silicon Valley Bank ranked as the 16th largest bank in the US, according to the AP report cited above. It said the bank worked as a financial lender for venture capital-backed businesses, which have been severely impacted over the past 18 months as a result of the Federal Reserve raising interest rates and decreasing investor demand for risky digital assets.

According to a Bloomberg report, Santa Clara, California-based SVB’s problem came to light after its chief executive officer Greg Becker sent a letter to shareholders Wednesday. The letter outlined that the bank had suffered a $1.8 billion loss on the sale of US treasuries. The bank’s parent company, SVB Financial Group, announced that it sold $21 billion of securities from its portfolio and was holding a $2.25 billion share sale to shore up finances. According to analysts, the decision was made in response to significant deposits leaving the bank as a result of a wider slowdown in the startup sector. SVB also anticipated a more drastic drop in net interest income, the report added.

Quoting sources, the Bloomberg report said the move spooked a number of prominent venture capitalists, including Peter Thiel’s Founders Fund, Coatue Management, and Union Square Ventures, who instructed portfolio businesses to limit exposure and pull their cash from the bank.

SVB's bonds experienced unprecedented falls, while its shares fell 60 per cent on Thursday, the report added. According to AP, shares of SVB Financial Group plummeted nearly 70 per cent before trading was halted before the opening bell on the Nasdaq.

CEO Greg Becker spoke to the bank's clients on a conference call, including venture capitalists, and pleaded with them to "remain calm" in an effort to prevent a bank run. CNBC in a report said that attempts to raise capital failed and the bank was now looking to sell itself.

SVB-Silvergate Twin Shocks

The fall of this US startup lender coincides with the shutdown of Silvergate Capital Corp., a crypto lender in the US. These twin shocks sent ripples through the banking industry and pushed stocks lower. According to a Bloomberg report, the KBW Bank Index, a benchmark of banking stocks, plunged 7.7 per cent, the most in nearly three years. Major US banks including Bank of America Corp., Wells Fargo & Co., and JPMorgan Chase & Co. all slid at least 5 per cent, while shares of Asian banks later followed their Wall Street peers lower.

SVB is also deeply involved in the US startup sector. According to its website, it does business with nearly half of all US venture capital-backed start-ups and 44 per cent of US venture-backed tech and healthcare companies that went public last year. It lists Pinterest Inc.t, Shopify Inc., and cybersecurity firm CrowdStrike Holdings Inc. among the bigger household names it has served.