One of the most prominent lenders in the world of tech startups, struggling under the weight of unhappy decisions and panicked customers, collapsed on Friday, forcing the federal government to step in.
The Federal Deposit Insurance Corporation announced Friday that it would acquire Silicon Valley Bank, a 40-year-old institution based in Santa Clara, California. The bank’s bankruptcy is the second largest in U.S. history and the largest since the 2008 financial crisis.
The move brought nearly $175 billion in customer deposits under the regulator’s scrutiny. While the rapid collapse of the country’s 16th largest bank evoked memories of the global financial panic a decade and a half earlier, it did not immediately prompt fears of widespread destruction in the financial industry or the global economy.
Silicon Valley Bank’s failure came two days after its emergency measures to process withdrawal requests and a precipitous fall in the value of its investment holdings, shocking Wall Street and depositors and sending its shares higher. The bank, which had $209 billion in assets at the end of 2022, was working with financial advisers as of Friday morning to find a buyer, a person with knowledge of the negotiations said.
While Silicon Valley Bank’s woes are unique, financial contagion seemed to be spreading to parts of the banking sector, prompting Treasury Secretary Janet Yellen to publicly reassure investors that the banking system is resilient.
Investors have dumped shares in Silicon Valley Bank’s competitors, including First Republic, Signature Bank and Western Alliance, many of which cater to start-up clients and have similar investment portfolios.
Trading in shares of at least five banks was suspended repeatedly throughout the day as their sharp declines triggered volatility limits on stock exchanges.
By comparison, some of the country’s largest banks appeared better insulated from the fallout. After a tumble on Thursday, shares in JPMorgan, Wells Fargo and Citigroup were generally flat on Friday.
That’s because the biggest banks operate in a very different world. Their capital requirements are more stringent and they also have a much broader deposit base than banks like Silicon Valley, which don’t attract crowds of retail customers. Regulators have also tried to discourage the big banks from focusing too much on a single line of business, and they’ve largely stayed away from riskier assets like cryptocurrencies.
“I don’t think this is a problem for the big banks — that’s the good news, they’re diversified,” said Sheila Bair, former FDIC chair Ms. Bair, adding that the largest banks would need to hold cash against even the safest forms of government bonds, you should expect ample liquidity.
Ms Yellen discussed the issues surrounding Silicon Valley Bank with banking regulators on Friday, according to a Treasury Department statement.
Federal Reserve and FDIC officials also held a bipartisan briefing for members of Congress organized by Maxine Waters, a California Democrat and the senior member of the House Financial Services Committee, according to a person familiar with the matter.
Silicon Valley Bank’s downward spiral accelerated at incredible speed this week, but its troubles have been brewing for more than a year. Founded in 1983, the bank has long been a preferred lender for startups and their executives.
Although the bank advertised itself as an “innovation economy partner”, some decidedly old-fashioned decisions led to this moment.
Loaded with cash from high-flying startups that had raised big bucks from venture capitalists, Silicon Valley Bank did what all banks do: it kept a fraction of the deposits and invested the rest in hopes of a return. In particular, the bank invested a large proportion of customer deposits in long-dated government and mortgage bonds, which promised modest, steady returns when interest rates were low.
That had worked well for years. The bank’s deposits doubled from $49 billion in 2018 to $102 billion by the end of 2020. A year later, in 2021, it had $189.2 billion in its coffers, as startups and Technology companies have reaped big profits during the pandemic.
But it bought huge amounts of bonds just before the Federal Reserve began raising interest rates a little over a year ago, and then failed to anticipate the possibility that interest rates would rise very quickly. As interest rates rose, these holdings became less attractive because newer government bonds paid more interest.
That might not have mattered as long as the bank’s customers hadn’t asked for their money back. However, as the flow of seed funding slowed at the same time as interest rates rose, the bank’s customers began withdrawing more of their money.
To pay for these redemption requests, Silicon Valley Bank sold some of its investments. In its surprise disclosure on Wednesday, the bank admitted it lost nearly $2 billion when it was almost forced to sell some of its holdings.
“It’s the classic Jimmy Stewart problem,” said Ms. Bair, referring to the actor who played a banker trying to stave off a bank run in the movie It’s a Wonderful Life. “If everyone starts withdrawing money at once, the bank will have to start selling some of its assets to give money back to depositors.”
These fears prompted investor concerns at some regional banks. Like Silicon Valley Bank, Signature Bank is a lender that caters to the startup community. It is perhaps best known for its ties to former President Donald J. Trump and his family.
First Republic Bank, a San Francisco-based lender focused on wealth management and private banking services for wealthy clients in the technology industry, recently warned that rising interest rates are hampering its ability to turn a profit. Its Phoenix-based competitor in the wealth management industry, Western Alliance Bank, is under similar pressure.
Separately, another bank, Silvergate, said on Wednesday that it would cease operations and go into liquidation after suffering heavy losses from its exposure to the cryptocurrency industry.
A spokesman for the First Republic responded to a request for comment by sharing a filing by the bank filed with the Securities and Exchange Commission on Friday that said its deposit base was “strong and very well diversified” and that its “liquidity position remains very strong”.
A spokeswoman for Western Alliance referred to a press release from the bank on Friday, in which it described the state of its balance sheet. “Deposits remain strong,” the statement said. “Asset quality remains excellent.”
Representatives from Signature and Silicon Valley Bank did not comment. Federal Reserve and FDIC officials declined to comment.
Some banking experts on Friday pointed out that a bank as large as Silicon Valley Bank might have managed its interest rate risk better if parts of the Dodd-Frank financial regulation package introduced after the 2008 crisis had not been rolled back under the president Trump card.
In 2018, Mr. Trump signed legislation that reduced regulatory scrutiny for many regional banks. Silicon Valley Bank CEO Greg Becker was a strong supporter of the change, which reduced the frequency of Fed stress tests for banks with assets between $100 billion and $250 billion.
Mr. Becker, who had been on the board of directors of the San Francisco Fed, was off the board as of Friday, a Fed spokesman said.
At the end of 2016, Silicon Valley Bank’s net worth was $45 billion. By the end of 2020, it had grown to over $115 billion.
Friday’s turmoil drew uncomfortable parallels to the 2008 financial crisis. While it’s not uncommon for small banks to fail, the last time a bank of this magnitude failed was in 2008 when the FDIC took over Washington Mutual.
The FDIC rarely takes over banks when markets are open, preferring to place a failing institution under receivership after close of business on a Friday for the weekend. But the banking regulator issued a press release in the early hours of trading Friday, saying it had formed a new bank, the National Bank of Santa Clara, to hold the failed bank’s deposits and other assets.
The regulator said the new unit would be operational by Monday and that checks written by the old bank would continue to be cleared. While customers with deposits of up to $250,000 — the maximum amount covered by FDIC insurance — will be recovered, there is no guarantee that depositors with larger amounts in their accounts will get all of their money back.
Those customers receive certificates for their uninsured funds, meaning they would be among the first in line to be repaid with recovered funds while the FDIC holds Silicon Valley Bank in receivership — although they may not get all of their money back.
When California bank IndyMac went bust in July 2008, like Silicon Valley Bank, it had no immediate buyer. The FDIC held IndyMac in receivership until March 2009, and large depositors eventually recovered only 50 percent of their uninsured funds. When Washington Mutual was bought by JPMorgan Chase, the account holders went sane.
Maureen Farrell and Joe Rennison contributed coverage.