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Silicon Valley Bank failure sends shock waves through financial system

Silicon Valley Bank customers left in the cold and the dark
Silicon Valley Bank customers left in the cold and the dark 05:02

SAN JOSE --  SVB Financial Group's announcement that it needed to sell billions of dollars of assets to make its customers whole continued to send Wall Street into panic mode.

Several news outlets, citing people familiar with the matter, reported that the financially-strapped bank was considering a potential sale to a larger institution.

On Friday morning, the California Department of Financial Protection and Innovation shut down the bank and appointed the Federal Deposit Insurance Corporation as the receiver. 

There was a line of about 50 people deep Friday morning, waiting in the rain at the Menlo Park branch of Silicon Valley Bank, trying to withdraw their money.  Instead, they were met with FDIC representatives.

"We have more than $250,000 with SVB," said Yegor Anchyshkin, co-founder and CEO of Instock.Com. "I am pretty concerned."

Instock.com is working to develop warehouse robotics. Anchyshkin said they need the money to keep the research going.

"It's more about timing. We're okay if everything resumes on Monday, Tuesday, Wednesday... no problem. But if it takes a long time, then it may take some action on our side, like go for a loan from another bank," said Anchyshkin.

Financial analyst S&P Global Market Intelligence reported 97% of SVB accounts had above the $250,000 insurance limit. 

The FDIC said it'll sell off SVB assets and divide that money up for those customers. 

"It may take a week, a year, three months. Nobody knows," said Anchyshkin. 

"And its that lack of certainty that's keeping many of us awake at night," said Ryan Gilbert, the founder of the Oakland-based venture capital firm Launchpad. 

Launchpad is backing 67 companies that collectively employ more than 1,000 employees. Many of those companies bank with SVB. 

"We're relying on SVB as our bank to move money on behalf of our payroll company into the accounts of our employees. And the key question is are those funds going to move as planned on Monday morning. That's uncertain," said Gilbert. "Many folks are living paycheck to paycheck, so I think we want to ensure that people do indeed get paid on time."

To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara. At the time of closing, the FDIC as receiver immediately transferred to the DINB all insured deposits of Silicon Valley Bank.

All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. 

SVB has 17 branches in California and Massachusetts. The main office and all branches of Silicon Valley Bank will reopen on Monday.

Shares of SVB were halted Friday morning after falling more than 60% in premarket trading. The stock tumbled 60% Thursday after the bank said it had to sell a portfolio of US Treasuries and $1.75 billion in shares at a loss to cover rapidly declining customer deposits - essentially facing a run on the bank.

Several other bank stocks were halted Friday, including First Republic, PacWest Bancorp, and Signature Bank.

SVB, a relatively unknown bank outside of Silicon Valley, lends to higher-risk tech startups that have recently been hurt by higher interest rates and dwindling venture capital.

The bank partners with nearly half of all venture-backed tech and healthcare companies in the United States, many of which pulled deposits out of the bank as rising interest rates raised concern that the bank may not be able to get all its customers' money back if they pulled their deposits en masse.

On Thursday, as bank stocks around the world fell in response to the crisis at SVB, contagion fears spread on Wall Street. Hedge fund manager Bill Ackman compared the situation at SVB to the final days of Bear Stearns, the first bank to collapse at the start of the 2007-2008 global financial crisis.

"The risk of failure and deposit losses here is that the next, least well-capitalized bank races a run and fails and the dominoes continue to fall," Ackman wrote in a series of tweets.

By Friday, many the panic appeared to ease. Bank stocks remained largely down, but stable.

Mike Mayo, Wells Fargo senior bank analyst, said the crisis at SVB may be "an idiosyncratic situation."

"This is night and day versus the global financial crisis from 15 years ago," he told CNN's Julia Chatterly on Friday. Back then, he said, "banks were taking excessive risks, and people thought everything was fine. Now everyone's concerned, but underneath the surface, the banks are more resilient than they've been in a generation."

South Bay Rep. Ro Khanna released the below statement regarding the bank: 

"I spoke with the White House this morning to emphasize the importance of the Silicon Valley Bank to the startup and tech economy. I will be working to ensure the bank's customers are protected and have continued access to their funds so startup employees and workers are paid. This impacts thousands of people in my district. We need to carefully monitor that this does not spread to other banks and be prepared to take comprehensive action if it does."   

Rate hikes take a bite
SVB's sudden fall mirrored other risky bets that have gotten exposed in the past year's market turmoil.

Crypto-focused lender Silvergate said Wednesday it is winding down operations and will liquidate the bank after being financially pummeled by turmoil in digital assets. Signature Bank, another crypto-friendly lender, was hit hard by the bank selloff, with shares sinking 30% before being halted for volatility Friday.

"SVB's institutional challenges reflect a larger and more widespread systemic issue: The banking industry is sitting on a ton of low-yielding assets that, thanks to the last year of rate increases, are now far underwater - and sinking," wrote Konrad Alt, co-founder of Klaros Group.

Alt estimated that rate increases have "effectively wiped out approximately 28% of all the capital in the banking industry as of the end of 2022."

When interest rates were near zero, banks loaded up on long-dated, low-risk Treasuries. But as the Fed raises interest rates to fight inflation, the value of those assets has fallen, leaving banks sitting on unrealized losses.

San Jose State Assistant Professor Matthew Faulkner teaches corporate finance. He blamed inflation and the rising interest rates for SVB's collapse.

"They don't get as much V.C. money investment. Investments are slowing down. They're not accessing capital as easily. So it started with some of those companies starting to pull out some money to pay their people, to continue their operations. And they're not necessarily having that new money flow in behind it," explained Faulkner.

Aside from shrinking deposits, he said SVB lost a lot of money recently from selling off U.S. treasuries and mortgage-backed securities it had invested in.

"The idea of everybody running at the same time to get their money causes a lot of shock and panic that could have attributed to how quickly it had to be shut down," said Faulkner. 

"One of our amazing investors alerted us. And essentially, he said, the bank is imploding. Get out as soon as you can," said Alison Greenberg, CEO of a maternity care startup based in Los Angeles. Her cofounder transferred nearly all their business funds just in time.

"The website was down, the phone lines were tied up. Even now, if you call the FDIC, you can only leave a message. This is extremely scary for those of us who, you know, pay salaries and put food on the table for our employees," she said.

SVB bought seemingly safe assets, primarily longer-term securities.

"The high interest rates that we [saw] the fed install across the economy has a negative effect, it makes the value of their investments worth less," said business and tech expert Shibani Joshi. "So if customers want to come in and their doing it increasingly so to get their deposits out, they don't have money, they have to sell some of their investments, and that's what Silicon Valley Bank did on Wednesday," she explained.

Along with the fed's hikes, at the same time, clients burned cash, and new money slowed. Recently, the bank reported that its assets were running low.

"Whether or not you have in your account a larger amount than that depends on what happens over the weekend," Joshi said. "If the company sells itself and sells its assets for equal or greater than the asset value then there's a better chance you're going to get more than 250K back, but if it doesn't there is a chance you could have a loss."

San Jose-based Roku held nearly $500 million at SVB and the company doesn't know if it will recover the funds.

"This is not a usual bank. This is not like the mega banks that we have out there. It is not a diversified bank, 50% of the startups in this country are funding through SVB. It is a niche player and that is why it has found itself in this niche situation," said Joshi.

The Treasury Department told CNN on Friday it's monitoring the situation as financial pressure at the parent of Silicon Valley Bank raises concerns about the broader health of America's banks.

"Treasury is aware of recent developments. The Department will remain in touch with regulators as appropriate," a Treasury spokesperson said in a statement.

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