Takeaways from America’s second largest bank failure

The 48-hour collapse of the New York (CNN) Silicon Valley Bank resulted in the second largest bankruptcy of a financial institution in US history.

SVB was one of America’s top 20 commercial banks and is now under the control of the US Federal Deposit Insurance Corporation after failing to repay customers who had withdrawn their deposits.

Although experts quashed fears of a broader contagion, the bank’s collapse could have a significant impact on the startup and tech sectors.

Here’s everything we know so far.

The SVB was a huge bank

Founded in 1983, Silicon Valley Bank funded nearly half of America’s venture capitalized technology and healthcare companies — they suffered from higher interest rates and dwindling venture capital.

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.

Its stunning and seemingly rapid fall is the largest US bank shutdown since Washington Mutual in 2008.

The FDIC acted unusually quickly

The wheels started turning on Wednesday, when SVB announced it had sold a number of securities at a loss and would be selling $2.25 billion in new stock to shore up its balance sheet.

California regulators shut down the tech lender on Friday. The FDIC acts as the receiver, which usually means liquidating the bank’s assets to repay its customers, including depositors and creditors.

The FDIC, an independent government agency that insures bank deposits and oversees financial institutions, said all insured depositors will have full access to their insured deposits no later than Monday morning. It said it would pay uninsured depositors an “advance dividend within the next week.”

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The FDIC took over Friday morning — usually waiting for markets to close.

“SVB’s condition was deteriorating so rapidly it could not have lasted five hours,” wrote Dennis M. Kelleher, CEO of Better Markets. “That’s because their depositors withdrew their money so quickly that the bank was insolvent and an intraday shutdown due to a classic bank run was inevitable.”

High interest rates led to its decline

To combat rampant inflation, the central bank has been aggressively raising interest rates since 2022. It made borrowing more expensive for businesses and individuals to cool down the economy.

With interest rates near historic lows, banks bought up long-dated, seemingly low-risk government bonds. But as interest rates have risen, the value of these assets has fallen, leaving them with unrealized losses.

High interest rates severely constrained technology companies, undercutting the value of technology stocks and making it difficult to raise capital.

Faced with these higher interest rates, the loss of IPOs and a funding crunch, SVB’s customers began withdrawing money from the bank.

“The higher interest rates have also lowered the value of their government bonds and other securities that the SVB needed to pay depositors,” said Mark Zandi, Moody’s chief economist. “All of this triggered the run on their deposits that forced the FDIC to take over the SVB.”

This is not yet a banking crisis

On Thursday, billionaire hedge fund manager Bill Ackman compared SVB to Bear Stearns, the first lender to collapse at the start of the 2007-2008 global financial crisis.

“The risk of default and deposit losses here is that the next least capitalized bank will rush and fail and the dominoes keep falling,” Ackman wrote on Twitter.

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But most analysts say SVB’s implosion appears company-specific for now, wrote Julia Horowitz and Anna Cooban.

Banks and lenders with specialized customers, just like the SVB, will feel the brunt of the consequences.

“The reason [SVB is] in trouble because of their exposure to certain industries,” said Jonas Goltermann, deputy chief economist for markets at Capital Economics. Most other banks, he added, are “more diversified.”

There are also fewer concerns about the stability of the banking sector due to the significant regulatory reforms introduced after the 2008 crisis.

Overall, normal consumers should hardly be affected. But the breakdown is a good reminder to be aware of where your money is kept and not have everything in one place.

“The first bank failure since 2020 is a wake-up call for people to always make sure their money is with an FDIC-insured bank and is within FDIC limits and compliant with FDIC rules,” said Matthew Goldberg, a Bankrate analyst.

Tech companies are picking themselves up

Catherine Thorbecke wrote that SVB is a top lender to the startup community whose founders are now busy making their money, making payrolls and covering operating costs.

“Now that the bank is broke, I just want to know what happens next,” Ashley Tyrner, founder of health food supplier FarmboxRx, told CNN in an email. “The FDIC covers 250,000, but will I get my entire eight-digit number back?”

Some get creative. Children’s toy, clothing and experience retailer CAMP emailed customers on Friday and advertised on its website.

“Unfortunately, we had most of our company’s cash assets with a bank that just collapsed. I’m sure you’ve heard about it.” It urged customers to use the code BANKRUN to save 40% on all merchandise (or pay full price – which they’d appreciate).

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Other lenders feel the pain

Lenders similar to SVB are in a predicament.

Crypto-focused lender Silvergate announced it is winding up operations and liquidating the bank after it was financially hit by the digital asset turmoil.

“In light of recent industry and regulatory developments, Silvergate believes an orderly winding-up of the bank’s operations and voluntary liquidation of the bank is the best way forward,” it said in a statement on Wednesday.

But the risks of a broader contagion are considered limited for the time being.

“Overall, the banking system is in good shape and able to weather significant shocks,” said Jens Hagendorff, finance professor at King’s College London. “I think SVB is special in that they have a volatile depositor base.”

Stocks plummeted on Friday

The Dow fell 345 points, or 1.1%, on Friday. The S&P 500 fell 1.5% and the Nasdaq Composite fell 1.8%.

For the week, the Dow fell 4.4%, its worst week since June. The S&P 500 lost 4.6% and the Nasdaq 4.7%.

Wall Street’s fear indicator, the VIX, rose 15% on Friday afternoon as investors rushed to safe havens to avoid being sucked into contagion in the banking sector, the market team reported.