Silicon Valley Bank seized by officials after imploding: How this happened and why
2023, just like 2008
Silicon Valley Bank (SVB) was shut down on Friday by the California Department of Financial Protection and Innovation because it ran out of money.
The state financial watchdog, citing the bank's "inadequate liquidity and insolvency," turned the VC finance house over to the Federal Deposit Insurance Corporation (FDIC), which is now tasked with returning customers' deposits within legal requirements - which is going to leave many investors out of pocket.
The FDIC insures accounts up to $250,000 and said, "All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023." It will do so through a newly created bank, National Bank of Santa Clara.
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Depositors who had more than $250,000 in the imploded bank face a less certain path to the restoration of the uninsured portion of their funds. The FDIC said it will pay uninsured depositors "an advance dividend" in the next week and a certificate for the remainder of their account balance, to be funded by the sale of SVB assets.
It's claimed that the vast majority of the bank's deposits exceed $250,000, and so are probably largely out of luck on getting funds back. At the start of the year, the FDIC said, SVB had about $209 billion in assets and about $175.4 billion in deposits.
According to FDIC data, there have been 561 bank failures from 2001 through 2022, with most of those during the 2009-2011 period, just after the 2007-2009 financial crisis. SVB was the 16th largest bank in the US and the largest to collapse since that time.
SVB, founded in 1983, lent money to many technology companies and pitched itself to startup founders as a reliable bank of choice. Clients included firms like Datadog, CIRQ, Pymetrics, and ZipRecruiter, and the bank had 17 branches in California and Massachusetts.
It is a cornerstone institution of today's universe of tech startups and players, and now it's failed. Tens of thousands of organizations relied on SVB, and startups are wondering if they'll be able to make payroll this month as a result of the bank's collapse.
Let's face it: A bad week
On Wednesday SVB Financial Group, the bank's parent company, announced plans to raise $1.25 billion through a stock offering, along with an additional $500 million offering of depository shares.
In an accompanying 8-K filing [PDF], the business said it was taking "strategic actions to strengthen our financial position" and insisted it is "well positioned to serve our clients through market volatility."
"We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their businesses," the company said.
Venture capital investment declined precipitously last year. With rising interest rates and ongoing market instability, money is now harder to come by for startups and more established firms.
SVB's venture capital clients interpreted the bank's fundraising in the worst possible way. On Thursday Bloomberg reported that several prominent VC firms had advised their startup clients to withdraw their funds from SVB. A bank run, in other words.
The VC warning came a day after Silvergate Capital, announced it was liquidating Silvergate Bank and shutting down its crypto settlement service, Silvergate Exchange Network.
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SVB Financial Group CEO Greg Becker held a conference call to allay concerns but it didn't work and bank customers continued to withdraw their funds.
The group's shares fell about 60 percent on Thursday, and were down about 60 percent more in premarket trading on Friday before California regulators intervened and seized the bank.
On Friday, cryptocurrency news publisher Cointelegraph published a video of customers lined up outside the bank in the rain, presumably hoping to withdraw their funds. A snap of this was shared on Reddit, too:
Other regional banks have seen their shares fall as a result of SVB's failure. Aspiring tech startups now face an even more challenging path to obtain and maintain funding. ®