The Silicon Valley Bank was shut down by US regulators on Friday after a sharp outflow of deposits and a failed attempt to raise new capital, casting doubt on the future of the technology-focused bank.
With about $209 billion in assets, SVB was the second-biggest bank failure in US history since the Washington Mutual collapse in 2008 and marks the rapid fall of a lender that was valued at more than $44 billion less than 18 months ago.
The Federal Deposit Insurance Corporation, the US regulator that guarantees bank deposits up to $250,000, said it was closing SVB and that insured depositors would have access to their funds by Monday.
Many of SVB’s clients were venture capital funds, as well as technology and healthcare startups, and their account balances had to be well above the maximum amount insured by the FDIC. The regulator said those depositors would receive their initial payment next week, with the rest depending on what happens to SVB’s assets.
The regulator has historically sought to combine bankrupt creditors with a larger, more stable entity. Washington Mutual, for example, was sold to JPMorgan Chase. The FDIC said it would use proceeds from the SVB sale to fund payouts to larger contributors.
SVB bond prices fell on Friday, with its senior debt trading at around 45 cents on the dollar and its junior debt at just 12.5 cents, suggesting bondholders are poised for big losses.
Earlier Friday, SVB abandoned its efforts to raise $2.25 billion in new funding to cover losses on its bond portfolio and began looking for a buyer to bail it out, people with knowledge of the effort said.
SVB shares were stalled during early trading on the New York Nasdaq and its woes have hit several other US banks believed to have similar saver and funding profiles.
Trading in Pacific West, Western Alliance and First Republic were all halted due to volatility after they all initially fell 40 to 50 percent. Trading was also briefly halted at Signature Bank after its shares fell nearly 30 percent. Some of these banks tried to calm the market by issuing statements highlighting their differences from SVB in terms of assets and depositor base.
The banking group’s troubles stem from a decision made at the height of the tech boom to place $91 billion of its deposits in long-term securities such as mortgage bonds and US Treasuries that were considered safe but are now worth $15 billion less than when SVB was bought. them after the Federal Reserve raised interest rates aggressively.
The company planned to sell to investors its $1.25 billion of common stock and an additional $500 million of mandatory convertible preferred shares, which are somewhat less dilutive to existing shareholders. This would help offset SVB’s losses of approximately $1.8 billion incurred from the sale of approximately $21 billion in securities initiated to cover clients withdrawing deposits.
On Thursday, SVB and its underwriter Goldman Sachs rushed to complete the share offering. While Goldman generated ample interest in the convertible bond deal by mid-afternoon, the sale of common stock was hampered as SVB shares tumbled, according to one person with knowledge of the effort. Private equity firm General Atlantic also pledged to provide $500 million in capital if the placement is completed.
The bank’s shares recorded their biggest drop on Thursday, wiping out a $9.6 billion market capitalization. SVB shares fell more than 60 percent in pre-market trading on Friday before trading was halted.
American bank failures have been extremely rare in recent years; the last FDIC-insured bank closed in October 2020, and last had over 10 in 2014.
The effects of SVB problems can be felt everywhere. The lender is a banking partner for half of U.S. venture capital-backed technology and life sciences companies and is heavily represented in providing $10 trillion in credit lines to the private equity industry.
His clients became increasingly wary of the bank’s financial position on Thursday as some startups began withdrawing their money. Some venture capital groups acknowledged that earlier this week they began advising some of their portfolio companies to consider withdrawing some of their deposits from the lender.
“40 years of SVB business relationships supporting Silicon Valley evaporated in 14 hours,” said one of the leaders of one multibillion-dollar venture capital fund.
Reporting by Joshua Franklin, Eric Platt, Ortenka Aliai, Antoine Gard and Brooke Masters in New York and Tubby Kinder and George Hammond in San Francisco. Additional reporting by Stephen Handel in New York and Robert Smith in London.