SVB is the largest banking failure since the 2008 financial crisis

  • California regulator closes SVB, designates FDIC as recipient
  • SVB focuses on lending to startups; Branches reopen on Mondays
  • FDIC to sell bank assets; There were reports of “chaos” amid the withdrawals
  • Bank stocks fell in the United States and Europe, but they were very low
  • The crisis reveals banking “weaknesses” amid rising interest rates

(Reuters) – Start-up-focused lender SVB Financial Group (SIVB.O) became the biggest bank to fail since the 2008 financial crisis on Friday, in a flash crash that shook global markets, leaving billions of dollars owned by companies and investors. cut off.

California banking regulators shut down the bank, which was doing business as Silicon Valley Bank, on Friday and designated the Federal Deposit Insurance Corporation (FDIC) as the recipient for the later disposition of its assets.

Headquartered in Santa Clara, the bank was ranked 16th in the US at the end of last year, with assets of about $209 billion. Details of the technology-focused bank’s sudden collapse were mixed, but the Fed’s steep interest rate hikes last year, which hampered financial conditions in the start-up field in which it was a prominent player, seemed front and center.

And while it was trying to raise capital to replace runaway deposits, the bank lost $1.8 billion on Treasury bonds whose value had been eroded by the Fed’s rate hikes.

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The Silicon Valley bank failure is the largest since the collapse of Washington Mutual in 2008, a landmark event that triggered a financial crisis that crippled the economy for years. The crash of 2008 led to stricter rules in the United States and abroad.

Since then, regulators have imposed stricter capital requirements on US banks with the goal of ensuring that the collapse of individual banks does not harm the financial system and the broader economy.

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Will head office and all branches of Silicon Valley Bank It reopened on March 13th All insured depositors will have full access to their insured deposits no later than Monday morning, Federal Insurance CorporationHe said.

But 89% of the bank’s $175 billion in deposits were not insured until the end of 2022, according to the Federal Insurance Corporation (FDIC), and their fate has yet to be determined.

The FDIC is racing to find another bank over the weekend willing to merge with the Silicon Valley bank, according to people familiar with the matter who asked not to be identified because the details are confidential. The sources added that while the FDIC hopes to come up with such a merger by Monday to protect unsecured deposits, there is no surefire deal.

A FDIC spokesman did not immediately respond to a request for comment.

buyers request

Separately, SVB Financial, the parent company of Silicon Valley Bank, is working with investment bank Centerview Partners and law firm Sullivan & Cromwell to find buyers for its other assets, which include investment bank SVB Securities, wealth manager Boston Private and equity research firm MoffettNathanson, the sources said. The sources added that these assets could attract competitors and private equity firms.

It is not clear whether any buyer would apply to purchase these assets without SVB Financial filing for bankruptcy first. Credit rating agency S&P Global Ratings said on Friday that it expects SVB Financial to enter bankruptcy due to its obligations.

SVB did not respond to calls for comment.

Companies such as video game maker RBLX.N and streaming hardware maker Roblox Corp (ROKU.O) said they have hundreds of millions of dollars in deposits in the bank. Roku said its deposits with SVB are largely uninsured, sending its shares down 10% in extended trade.

Tech workers whose salaries depend on the bank were also worried about getting paid on Friday. The SVB branch in San Francisco showed a note taped to the door telling customers to call a toll-free phone number.

Reuters graphics

SVB Financial CEO Greg Baker sent a video message to employees on Friday acknowledging the “extremely difficult” 48 hours before the bank collapsed.

The problems at SVB underscore how the US Federal Reserve and other central banks’ campaign to fight inflation by ending the era of cheap money exposes vulnerabilities in the market. Concerns pervaded the banking sector.

US banks have lost more than $100 billion in stock market value over the past two days, with European banks losing about another $50 billion in value, according to Reuters calculations.

US lenders First Republic Bank (FRCN) and Western Alliance (WAL.N) said on Friday that their liquidity and deposits remain strong, aiming to calm investors as their shares plunge. Others such as Germany’s Commerzbank (CBKG.DE) issued extraordinary data to reassure investors.

More pain

Some analysts expect more pain for the sector as this incident has led to widespread concern about hidden risks in the banking sector and its vulnerability to the high cost of funds.

“There could be a bloodbath next week… Short sellers are out there and they’re going to attack every bank, especially the smaller ones,” said Christopher Whalen, Chairman of Whalen Global Advisors.

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The US Treasury said US Treasury Secretary Janet Yellen met with bank regulators on Friday and expressed “full confidence” in their abilities to respond to the situation.

The White House said on Friday that it trusts and trusts US financial regulators, when asked about the failure of SVB.

Reuters graphics

The genesis of the SVB collapse lies in a rising interest rate environment. As high interest rates shut down the initial public offering market for many startups and made it more expensive to raise private funds, some SVB clients began withdrawing funds.

To fund the redemptions, SVB sold a $21 billion bond portfolio made up mostly of U.S. Treasurys on Wednesday, and said it would sell $2.25 billion in common stock and convertible preferred stock to fill the funding gap.

By Friday, the crash in the share price made raising capital unacceptable and sources said the bank tried to look at other options, including a sale, until regulators stepped in and shut the bank down.

The last FDIC-insured institution to close was Elmina State Bank in Kansas, on October 23, 2020.

Writing by John O’Donnell, Noor Zainab Hussain, Paritosh Bansal; Additional reporting by Nikette Nishant, Emma Victoria Farr, Nathan Frandino, Anna Tong, Crystal Ho, Greg Bensinger, Pete Schroeder, Greg Romiliotis, Joe Mason, Mark Jones, Ian Weathers, Elizabeth Hocroft, Noel Randewicz, Yoruk Bahceli, Lanan Nguyen, Eva Matthews and Nupur Anand; Writing by Nick Zieminski; Editing by Toby Chopra, Anna Driver, William Mallard and Raju Gopalakrishnan

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