Follow Us

Saturday, March 11, 2023

March 11, 2023

Silicon Valley Bank (SVB), which specialized in providing financial services to tech startups, became the biggest US lender to fail in over a decade after an unsuccessful attempt to raise capital and a cash exodus from the startups that had fueled the lender’s growth. Regulators stepped in and seized the bank on Friday, in a stunning downfall for a lender that had quadrupled in size over the past five years and was valued at over $40 billion as recently as last year. 

The move by California state watchdogs to take possession of the bank and appoint the Federal Deposit Insurance Corp. as receiver adds to the turmoil at smaller lenders caused by the US’s rapid interest-rate increases. Banks were already suffering from the jump in rates that eroded the value of their portfolios, and meanwhile customers in the technology and crypto startup worlds were yanking cash amid a slump in their businesses. In SVB’s case, the turmoil fed on itself as customers worried about its health rushed to withdraw money.

Peter Thiel’s Founders Fund and other high-profile venture capital firms advised their portfolio companies to pull money from the bank after parent company SVB Financial Group announced that it would try to raise more than $2 billion after a significant loss on its portfolio. The calls from these venture capital firms followed other tech startup customers withdrawing their money from the bank. The bank had about $209 billion in total assets and about $175.4 billion in total deposits at the end of last year, according to the FDIC.

“Bank runs are a lot about psychology. And at this point, it’s very rational to be nervous,” said Saule Omarova, a law professor at Cornell University. The government is assessing whether it can sell SVB or parts of it by Monday, said a person familiar with officials’ conversations. That’s the day when customers can come to the bank and start taking out the rest of their money. Receivership typically means a bank’s deposits will be assumed by another healthy bank, or the FDIC will pay depositors up to the insured limit.

“The FDIC receivership will end the uncertainty about this particular bank,” Omarova said. “But I don’t think that necessarily itself stops people from feeling less safe if they have some kind of exposure to assets or they hold their own money in banks with similar risk profiles.”

In Washington, the situation prompted a series of discussions among top regulators. Treasury Secretary Janet Yellen called a meeting Friday with leaders from the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency to discuss developments around SVB. Yellen said in a statement that the US banking system “remains resilient” and the regulators “have effective tools” to address the fallout.

The government is assessing whether it can sell SVB, or parts of it, by Monday, said a person familiar with officials’ conversations, who asked not to be identified speaking about internal deliberations. That’s the day when customers can come to the bank and start taking out the rest of their money. Treasury representatives didn’t immediately respond to an emailed request for comment.

In conclusion, Silicon Valley Bank's downfall is a significant event that highlights the potential risks faced by the banking industry and the importance of maintaining adequate liquidity. The situation at SVB shows that banks are vulnerable to a sudden withdrawal of funds, especially when faced with a crisis of confidence. It also underscores the need for regulators to be vigilant and proactive in monitoring banks' financial health, especially during periods of economic stress.