How does a bank collapse in 48 hours? A chronicle of the SVB fall

NEW YORK (CNN) This week, the go-to place for US tech startups quickly went off track, leaving its high-profile clients and investors in limbo.

Silicon Valley Bank, which was facing a sudden bank run and capital crisis, collapsed Friday morning and was taken over by federal authorities.

It was the largest bankruptcy by a US bank since Washington Mutual in 2008.

Here’s what we know about the bank’s demise, and what could be next.

What is SVB?

Founded in 1983, SVB specializes in banking for tech startups. It provided financing to nearly half of the US’s venture-backed technology and healthcare companies.

Although relatively unknown outside of Silicon Valley, SVB was among the top 20 American commercial banks with total assets of $209 billion at the end of last year, according to the FDIC.

Why did it fail?

In short, the SVB experienced a classic run on the bench.

The longer version is a bit more complicated.

Several forces collided to bring 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 weakened momentum in technology stocks, which SVB had benefited from.

Higher interest rates also hurt the value of long-dated bonds, which SVB and other banks had gobbled up during the ultra-low, near-zero era. SVB’s $21 billion bond portfolio has averaged a return of 1.79% — the current 10-year Treasury yield is about 3.9%.

At the same time, venture capital began to dry up, forcing start-ups to call on SVB funds. So the bank was sitting on a mountain of unrealized losses on bonds as the pace of customer withdrawals escalated.

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The panic is spreading…

On Wednesday, SVB announced that it has sold a number of securities at a loss and that it will also sell $2.25 billion of new shares to bolster its balance sheet. That sparked panic from major venture capital firms, which were reportedly advising companies to withdraw their money from the bank.

The bank’s shares began falling Thursday morning, dragging other bank stocks lower in the afternoon as investors feared a repeat of the 2007-2008 financial crisis.

Trading in SVB shares was halted on Friday morning and efforts to quickly raise capital or find a buyer were abandoned. California regulators intervened, closing the bank and placing it under the receivership of the Federal Deposit Insurance Corporation.

Fear of infection disappears

Despite initial panic on Wall Street, analysts said the collapse of the SVB is unlikely to trigger the kind of domino effect that swept the banking industry during the financial crisis.

“The system is as well capitalized and liquid as it has ever been,” said Mark Zandi, Moody’s chief economist. “The banks that are in trouble now are far too small to pose a serious threat to the broader system.”

By Monday morning at the latest, all insured depositors will have full access to their insured deposits, the FDIC said. It pays uninsured depositors an “advance dividend within the next week.”

What’s next?

While broader contagion is unlikely, smaller banks, which are disproportionately tied to financially troubled industries like technology and crypto, could face a tough path, according to Ed Moya, senior market analyst at Oanda.

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“Everyone on Wall Street knew that the Fed’s rate-hiking campaign would eventually break something, and right now that’s killing small banks,” Moya said Friday.

The FDIC typically sells a failed bank’s assets to other banks and uses the proceeds to repay depositors whose funds were uninsured.

A buyer could still be found for the SVB, but this is far from guaranteed.