In what serves as the epilogue to its recent journey, Silicon Valley Bank (SVB), one of the leading financial institutions in the tech financing industry and under the SVB Financial Group, has suspended trading on its platform. Regulators have now shut down the bank and Federal Deposit Insurance Corporation has taken charge of its deposits.
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.
While banking activities across SVB’s branches are closed momentarily, SVB’s operations will resume on Monday — this time, with the FDIC in charge. One of the top priorities of the FDIC is to give customers access to their deposits. Many of SVB’s biggest customers are high profile startups from across the globe, including several unicorns.
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.
The development comes soon after SVB – the 16th largest bank in the US – said it was trying to launch a share sale of $2.25 billion after it incurred a large loss on its portfolio of US Treasuries and mortgage-backed securities. SVB sought to make this move owing to high deposit outflows at the bank, which was in turn caused by the prevailing economic downturn in the startup sector and a drop in its net interest income. The bank had been forced to sell all of its available-for-sale bonds at a loss of $1.8 billion. This development sparked fears of other banks running into similar problems (and incurring losses on their bond portfolios) and led to the widespread selling of bank shares. The brutal sell-off of shares occurred on Thursday and early Friday and coupled with many firms withdrawing their funds from the bank, sent the total stocks of SVB down by 60%.
This development marks the worst showing by SVB shares in the past 35 years on Thursday, as well as the largest bank failure since the financial crisis in 2008. SVB Financial Group CEO Greg Becker sought to pacify clients and investors on Thursday, advising clients in a conference call to “stay calm” amid concern about the bank’s financial position, according to a person familiar with the matter. The stocks of several other banks were halted on Friday, including First Republic, PacWest Bancorp, and Signature Bank. For those who are unaware, SVB has lent a fair sum of money to higher-risk tech startups, many of whom have been hit by higher interest rates.
SVB did not respond to a request for comment on the matter, but it is evident that the billion-dollar share sale did not sit well with banks, investors, and Wall Street alike. And even though it halted trading on its platform, the bank went on to earn the dubious distinction of becoming the first financial institution insured by the FDIC (Federal Deposit Insurance Corporation) to fail this year. The American regulator and the Californian banking authorities, in response, have taken over the bank and its customer deposits.
A statement revealed that the FDIC had been appointed as the receiver. It later said that the moves were made to “protect insured depositors,” even as the bank was scrambling to raise money. A report by CNBC informed that SVB was on the search for a buyer after being unable to raise capital in its offering. But the fact that the outflow of deposits outpaced the sales process made it difficult for buyers to value the bank.
“SVB’s institutional challenges reflect a larger and more widespread systemic issue: The banking industry is sitting on a ton of low-yielding assets that, thanks to the last year of rate increases, are now far underwater – and sinking,” wrote Konrad Alt, co-founder of Klaros Group. The fact that this comes on the heels of the collapse of the crypto-focussed Silvergate bank does little to assuage the fears of Wall Street and initiated a new wave of deposit withdrawals as VCs instructed their portfolio companies to withdraw their funds.