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Silicon Valley Bank shut down by US banking regulators

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Silicon Valley Bank was shut down by U.S. regulators on Friday after a surge in deposit outflows and new funding failures cast doubt on the tech-focused bank’s future.

With approximately $209 billion in assets, SVB is the second-largest bank failure in U.S. history after Washington Mutual’s collapse in 2008, and a rapid turnaround for lenders valued at more than $44 billion less than 18 months ago. It shows a serious downfall.

The Federal Deposit Insurance Corporation, the U.S. regulator that insures bank deposits of up to $250,000, said it would close the SVB and allow insured depositors to access the funds by Monday.

Many of SVB’s clients were venture capital funds and technology and healthcare start-ups with account balances well in excess of the FDIC-guaranteed maximum. The regulator said those depositors will receive their first payments next week and the rest will depend on what happens to SVB’s assets.

Regulators have historically tried to merge failing lenders with larger, more stable institutions. For example, Washington Mutual was sold to JPMorgan Chase. The FDIC said it would use the SVB sale proceeds to pay out large depositors.

Prices of SVB bonds plummeted on Friday, with senior debt at around 45 cents on the dollar and junior debt at 12.5 cents, suggesting bondholders are prepared to lose big.

SVB had given up on raising $2.25 billion to cover losses in its bond portfolio and had begun looking for a buyer, people familiar with the matter said. SVB’s shares were halted during early trading on New York’s Nasdaq exchange, hitting shares of several other US banks seen with similar depositor and funding profiles.

Trading in Pacific West, Western Alliance and First Republic were all halted due to volatility after initially dropping 40-50%. Also, Signature Bank’s stock was temporarily suspended after its share price fell by nearly 30%. Several of these banks tried to reassure the market by making statements highlighting the differences with his SVB in terms of assets and depositor base.

The banking group’s troubles began at the height of the tech boom when it decided to keep $91 billion of its deposits in long-term securities, such as mortgage bonds and US Treasuries, which were considered safe. increase. We bought them after the Federal Reserve aggressively raised interest rates.

The plan was to sell $1.25 billion of common stock to investors and an additional $500 million of mandatorily convertible preferred stock. That would help cover the roughly $1.8 billion loss SVB suffered from the sale of about $21 billion of securities initiated to cover its withdrawing customers.

Bar chart showing SVB is second biggest failure in U.S. history

On Thursday, SVB and its underwriter Goldman Sachs competed to go public. By mid-afternoon, Goldman had secured a substantial stake in the convertible bond deal, but was struggling to sell its common stock as SVB shares fell, according to people familiar with the matter. Private, his equity firm General Atlantic, has also pledged $500 million in equity if the offering is completed.

Bank stocks posted their biggest ever drop on Thursday, wiping out $9.6 billion from their market cap. SVB’s shares were down more than 60% in Friday’s pre-market trading before the trading halt.

U.S. bank failures have been extremely rare in recent years. The last time an FDIC-insured bank closed was October 2020, and the last time more than 10 of his banks closed was in 2014.

The impact of the SVB problem may be felt widely. The lender is a banking partner for half of the venture-backed U.S. technology and life sciences companies, and has a significant presence in providing credit facilities to the $10 trillion private capital industry. Customers were becoming increasingly concerned about their bank’s financial position on Thursday when some start-ups began to withdraw cash. Some venture capital groups have confirmed that they began advising some of their portfolio companies to consider withdrawing some of their deposits from lenders earlier this week.

“SVB’s 40-year business relationship that underpinned Silicon Valley was gone in 14 hours,” said a senior executive at a multi-billion dollar venture capital fund.

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1 comment

D.L. March 11, 2023 - 9:51 am

What a time we’re living in.


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