It took only 48 hours for Silicon Valley Bank to become the nation’s second-largest bank failure.
The company’s problems started on March 8, when the financial institution informed investors that it needed to generate $2.25 billion to cover an unexpected decline in deposits and improve its balance sheet and overall financial position.
This revelation erased about $10 billion in market capitalization in a single trading session, as the stock plunged by 65 percent to $106. In after-hours trading on March 10, shares tumbled by another 60 percent. SVB Financial bonds also slumped, to 31 cents on the dollar.
Founded in 1983, the Santa Clara, California-based bank is a top Silicon Valley lender. The sudden collapse of SVB has created uncertainty among tech investors and startups who had large exposure to the bank.
The primary reason for the bank’s demise, according to industry analysts, was that it heavily invested customer deposits in Treasury bonds, which are highly sensitive to interest rates.
“There is no question that SVB is in a cash crisis because of its over exposure to the tech sector,” Chenxi Wang, founder and general partner of Rain Capital, said in a note. “The bank also made balance sheet management errors by putting too much money into long-term bonds, which became a problem when interest rates surged. This, coming on the heels of the Silvergate Bank liquidation, caused non-trivial panic.”
As California banking regulators shuttered SVB, it became the largest bank to fail since the 2008 financial crisis, when Washington Mutual collapsed.
Uninsured Deposits
The Federal Deposit Insurance Corp. (FDIC) took over Silicon Valley Bank and renamed it the “Deposit Insurance National Bank of Santa Clara.”Silicon Valley Bank had about $209 billion in total assets and roughly $175.4 billion in total deposits as of Dec. 31, 2022, according to the FDIC.
“At the time of closing, the amount of deposits in excess of the insurance limits was undetermined,” the FDIC stated. “The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.”
Who Will Bail Out SVB?
The SVB failure has the U.S. financial sector on edge, industry observers say.Will the government bail out the company, or will a private bank come to its rescue?
“Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out, and the reforms that have been put in place means that we’re not going to do that again,” she said. “But we are concerned about depositors and are focused on trying to meet their needs.”
She said regulators are looking at a plethora of options, noting that officials want to make sure that “the troubles that exist at one bank don’t create contagion to others that are sound.”
Billionaire investor and hedge fund manager Bill Ackman thinks a government bailout “should be considered” to prevent a domino effect in the financial industry.
Ackman believes that any state-led bailout should go toward the depositors rather than management or equity holders, noting that improper risk management shouldn’t be rewarded.
“The risk of failure and deposit losses here is that the next, least well-capitalized bank faces a run and fails and the dominoes continue to fall. That is why gov’t intervention should be considered,” he said.
But Zack Ellison, founder of venture debt investment firm Applied Real Intelligence, thinks a large bank will purchase SVB “to restore confidence.”
“The buyer would be getting a steal, considering SVB’s prominence in the technology and innovation communities,” he told The Epoch Times. “SVB has far greater relevance in Silicon Valley than its closest competitors and has access to VCs [venture capital firms] and founders that every bank craves.”
JPMorgan Chase could be the most likely candidate to swoop in and place a bid for SVB since the big bank has grown its venture lending business, Ellison said.
Others assert that this could be a sign of trouble brewing in the sector, especially after the California-based and cryptocurrency-focused lender Silvergate Bank announced that it would be winding down operations and beginning the liquidation process due to inadequate capitalization.
Other Banks’ Shares Tumble
Investors also panicked about several individual bank stocks that market analysts warned share some of SVB’s similarities. At the end of the trading week, PacWest Bancorp fell by nearly 38 percent, First Republic slumped by about 14 percent, and Western Alliance Bancorp declined by more than 20 percent (in after-hours trading, shares tumbled by another 2.7 percent).That said, even stocks in the big banks, such as the Bank of America, Citigroup, and Wells Fargo, fell on March 9, wiping out tens of billions of dollars in market value.
Because of concerns over a widespread contagion effect, there’s a belief that the Federal Reserve might raise interest rates by 25 basis points instead of the widely anticipated half-point boost. Since tightening credit conditions were one of the reasons behind SVB’s downfall, another quarter-point increase to the benchmark federal funds rate could be a reality.
White House officials confirmed that the administration is monitoring the situation.
President Joe Biden spoke with California Gov. Gavin Newsom on March 11 to discuss the SVB collapse and how authorities might resolve the matter. Treasury Secretary Janet Yellen met with officials at the Fed, FDIC, and the Office of the Comptroller of the Currency on March 10.
Cecilia Rouse, head of the Council of Economic Advisers (CEA), assured reporters that the banking system is vastly different from where it was during the 2008 financial crisis.
“Our banking system is far more resilient than it was in 2008. We’ve learned a lot. We’ve got better tools,” she said at a press briefing on March 10. “We put in guardrails, and our regulators have much more visibility into the banking sector than they did a decade ago.”
Not everyone is keen on having the federal government potentially intervene and bail out the bank.
