How does a bank collapse in 48 hours? A timeline of the SVB fall
Silicon Valley Bank, facing a sudden bank run and capital crisis, collapsed Friday morning and was taken over by federal regulators.
It was the largest failure of a US bank since Washington Mutual in 2008.
Here’s what we know about the bank’s downfall, and what might come next.
What is SVB?
Founded in 1983, SVB specialized in banking for tech startups. It provided financing for almost half of US venture-backed technology and health care companies.
While relatively unknown outside of Silicon Valley, SVB was among the top 20 American commercial banks, with $209 billion in total assets at the end of last year, according to the FDIC.
Why did it fail?
In short, SVB encountered a classic run on the bank.
The longer version is a bit more complicated.
Several forces collided to take down the banker.
First, there was the Federal Reserve, which began raising interest rates a year ago to tame inflation. The Fed moved aggressively, and higher borrowing costs sapped the momentum of tech stocks that had benefited SVB.
Higher interest rates also eroded the value of long-term bonds that SVB and other banks gobbled up during the era of ultra-low, near-zero interest rates. SVB’s $21 billion bond portfolio was yielding an average of 1.79% — the current 10-year Treasury yield is about 3.9%.
At the same time, venture capital began drying up, forcing startups to draw down funds held by SVB. So the bank was sitting on a mountain of unrealized losses in bonds just as the pace of customer withdrawals was escalating.
The panic takes root…
On Wednesday, SVB announced it had sold a bunch of securities at a loss, and that it would also sell $2.25 billion in new shares to shore up its balance sheet. That triggered a panic among key venture capital firms, who reportedly advised companies to withdraw their money from the bank.
The bank’s stock began plummeting Thursday morning and by the afternoon it was dragging other bank shares down with it as investors began to fear a repeat of the 2007-2008 financial crisis.
By Friday morning, trading in SVB shares was halted and it had abandoned efforts to quickly raise capital or find a buyer. California regulators intervened, shutting the bank down and placing it in receivership under the Federal Deposit Insurance Corporation.
Contagion fears subside
Despite initial panic on Wall Street, analysts said SVB’s collapse is unlikely to set off the kind of domino effect that gripped the banking industry during the financial crisis.
“The system is as well-capitalized and liquid as it has ever been,” Moody’s chief economist Mark Zandi said. “The banks that are now in trouble are much too small to be a meaningful threat to the broader system.”
No later than Monday morning, all insured depositors will have full access to their insured deposits, according to the FDIC. It will pay uninsured depositors an “advance dividend within the next week.”
So, while a broader contagion is unlikely, smaller banks that are disproportionately tied to cash-strapped industries like tech and crypto may be in for a rough ride, according to Ed Moya, senior market analyst at Oanda.
“Everyone on Wall Street knew that the Fed’s rate-hiking campaign would eventually break something, and right now that is taking down small banks,” Moya said on Friday.
Silicon Valley Bank collapse has echoes of 2008. Here’s why things are different this time
The failure of Silicon Valley Bank is rattling markets and raising uncomfortable questions: Will it undermine the broader banking system and start a new meltdown?
Billionaire hedge fund manager Bill Ackman hascompared SVB to Bear Stearns, the first lender to collapse at the start of the 2007-2008 global financial crisis.
“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,” Ackman wrote on Twitter.
Yet most analysts say the implosion of SVB appears company-specific for now. A crucial lender to US technology startups, the bank came under pressure as Silicon Valley funding dried up, the result of an economic slowdown and rapidly rising interest rates.
“The reason [SVB is] in trouble is because they have exposure to particular industries,” said Jonas Goltermann, deputy chief markets economist at Capital Economics. Most other banks, he added, are more “diversified.”
And Deputy Treasury Secretary Wally Adeyemo on Friday sought to reassure the public about the health of the banking system after the sudden collapse of SVB.
“Federal regulators are paying attention to this particular financial institution and when we think about the broader financial system, we’re very confident in the ability and the resilience of the system,” Adeyemo told CNN in an exclusive interview.
The comments come after Treasury Secretary Janet Yellen convened an unscheduled meeting of financial regulators to discuss the implosion of Silicon Valley Bank, a major lender to the hurting tech sector.
“We have the tools that are necessary to [deal with] incidents like what’s happened to Silicon Valley Bank,” Adeyemo said.
There’s also less anxiety about the stability of the banking sector due to the significant regulatory reforms put in place after the crisis in 2008.
Still, SVB’s collapse reveals stresses created by the fastest jump in borrowing costs in decades. Central banks have raised interest rates to tame high inflation, but the pace of the increases has thrown up unexpected problems. And worries persist about further unintended consequences.
For example, banks that scooped up US Treasuries and other bonds when interest rates were very low are now sitting on losses as borrowing costs have risen and bond prices have gone down.
Bank stocks rattled
Founded in 1983, SVB provided financing for almost half of US venture-backed technology and health care companies. Its problems came to light this week when it revealed that it was in dire need of funds. The company shared plans Wednesday to raise more than $2 billion from investors to fill a hole in its finances created by the sale of part of its hard-hit bond portfolio.
SVB put the bonds up for sale as customers, facing leaner times, pulled their money from the bank. Shares of SVB plunged 60% on Thursday. Trading in the stock was halted Friday amid reports that the bank, unable to raise allthe money it needed, was hunting for a buyer.
Then California’s regulators intervened, shutting the bank down and calling in the US Federal Deposit Insurance Corporation to act as receiver. Silicon Valley Bank had about $209 billion in total assets and $175 billion in total deposits as of the end of last year, according to the FDIC.
In a sign concerns are spilling into other parts of the banking sector, sharesof other lenders have been falling, too. JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C) all suffered drops of between 4% and 7% Thursday.
While their shares stabilized on Friday, smaller banks continued to suffer. An exchange-traded fund tracking regional banks, the SPDR S&P Regional Banking ETF, was down more than 6%. Banks in Europe were also hit.
What happens next?
Other lenders with highly specialized clientele could come under pressure. Crypto-focused lender Silvergate said Wednesday that it was winding down operations after recent turmoil in digital assets pummeled its finances.
Butthe risks of broader contagion are thought to be limited for now.
“Overall, the banking system is in good shape and able to withstand significant shocks,” said Jens Hagendorff, a finance professor at King’s College London. “I think SVB is special in the sense that they have a fickle depositor base.”
Mike Mayo, senior bank analyst at Wells Fargo, said the crisis at SVB might be “an idiosyncratic situation.”
“This is night and day versus the global financial crisis from 15 years ago,” he told CNN’s Julia Chatterley Friday. Back then, he said, “banks were taking excessive risks, and people thought everything was fine. Now everyone’s concerned, but underneath the surface the banks are more resilient than they’ve been in a generation.”
Similarly,former US Treasury Secretary Larry Summers told Bloomberg News Friday that he saw “no systemic risk” if the situation “is handled reasonably,” adding he had “every reason to think that it will be.”
Yet the tumult reveals the bind banks could find themselves in as economic and market conditions change rapidly.
SVB’s downfall was tied, in part, to the plunge in the value of bonds it bought up during boom times, when it had a lot of customer deposits coming in and needed somewhere to park the cash.
The rise in interest rates has made low-yielding assets like bonds worth a lot less. That caused problems when the bank needed to raise fundsquickly.
“[Falling bond prices are] only really a problem in a situation where your balance sheet is sinking quite quickly… [and you] have to sell assets that you wouldn’t ordinarily have to sell,” said Luc Plouvier, senior portfolio manager at Van Lanschot Kempen, a Dutch wealth management firm.
SVB may not be the only institution that needs to tackle this issue.
“Many institutions — from central banks, commercial banks and pension funds — sit on assets that are worth significantly less than reported in their financial statements,” Hagendorff said. “The resulting losses will be large and need to be financed somehow. The scale of the problem is starting to cause concern.”
— Allison Morrow, Nicole Goodkind and Matt Egan contributed reporting.