Regulators have shut down Silicon Valley Bank, and the FDIC (Federal Deposit Insurance Corporation) has assumed control.

On Friday, Silicon Valley Bank experienced a significant bank failure, which is the second-largest in US history. The bank attempted to raise fresh capital, but a run on deposits ultimately led to its collapse. The Federal Deposit Insurance Corp. (FDIC) has announced that it has taken over the bank by creating a new entity called the Deposit Insurance National Bank of Santa Clara. The FDIC has also transferred all of the bank's deposits to the new entity.

The FDIC also stated that the bank's closure is expected to cost its deposit insurance fund around $400 million. This comes as a major blow to the bank's clients and shareholders, as Silicon Valley Bank was known for its focus on serving the technology and innovation sectors.

The bank had been struggling for some time due to mounting losses and a decline in its capital reserves. Despite its efforts to raise fresh capital, it was unable to stave off the run on deposits that ultimately led to its collapse. The FDIC has assured depositors that their accounts are safe and that they will be able to access their funds as usual.

The closure of Silicon Valley Bank is a significant event in the US banking industry, as it highlights the risks associated with focusing on specific sectors and industries. It also serves as a reminder of the importance of maintaining strong capital reserves and risk management practices to prevent bank failures.

According to the Federal Reserve, as of December 31, the bank had assets worth around $209 billion, making it the 16th largest bank in the US. It is the largest bank to fail since the financial crisis of 2008, only surpassed by the collapse of Washington Mutual Inc. during that time.

SVB Financial Group, the bank's parent company, was urgently seeking a buyer after abandoning a planned $2.25 billion share sale on Friday morning. However, regulators did not wait for the outcome of these efforts. The California Department of Financial Protection and Innovation closed the bank within hours on Friday and placed it under the FDIC's control.

The collapse of Silicon Valley Bank is a significant event that could have a ripple effect on the financial sector, particularly in the technology and innovation sectors, which the bank served. Its closure could also lead to job losses and affect the wider economy.

The FDIC has assured depositors that their accounts are safe and that they will be able to access their funds as usual. However, the bank's shareholders are likely to suffer significant losses, and its failure could have implications for the broader financial system.

The collapse of Silicon Valley Bank underscores the importance of maintaining strong risk management practices and adequate capital reserves in the banking sector. It is a reminder that even large and seemingly stable banks are not immune to failure, and that regulators must remain vigilant to ensure the stability of the financial system.

Investors have expressed concern about banks that share a similar profile to Silicon Valley Bank. For instance, San Francisco-based First Republic Bank, which serves businesses and wealthy individuals, has experienced a 30% decline in its shares since Wednesday. However, the bank has stated that its deposit base is strong.

Similarly, PacWest Bancorp has seen a 54% decrease in its shares over the past two days. More than two-thirds of its lending portfolio is linked to real estate, with a significant portion loaned to venture-capital firms.

These drops in share prices highlight how the failure of Silicon Valley Bank has raised concerns about the potential risks in the financial system, especially for banks that have a similar focus. The decline in the value of these banks' shares could also indicate that investors are reassessing their positions in such companies and possibly moving their investments elsewhere.

Furthermore, the fact that PacWest Bancorp has a significant portion of its lending portfolio tied to venture-capital firms raises concerns about the potential ripple effects on the technology and innovation sectors, which depend heavily on these types of financing.

Overall, the collapse of Silicon Valley Bank is a reminder of the risks involved in banking and finance, especially when institutions become too focused on specific sectors or industries. It highlights the need for strong risk management practices and sufficient capital reserves to ensure the stability of the financial system.

Silicon Valley Bank primarily served the enclosed ecosystem of startups and their investors. The bank's deposits grew in tandem with the tech industry, increasing by 86% in 2021 to reach $189 billion and peaking at $198 billion just one quarter later. To manage these deposits, the bank invested substantial amounts in U.S. Treasurys and other government-backed debt securities.

However, the tech sector experienced a downturn when the Federal Reserve began raising interest rates last year in an effort to control inflation. This led to startups withdrawing their deposits from SVB at a faster rate than the bank had anticipated. Additionally, new investments in the sector stalled, which meant that fresh funds were not flowing into the bank.

The combination of declining deposits and stalling investments created a liquidity crunch for Silicon Valley Bank. The bank attempted to raise fresh capital by selling $2.25 billion worth of shares, but it was forced to scrap the plan after investors showed little interest. This lack of fresh capital made it difficult for the bank to meet its obligations, eventually leading to its collapse.

The failure of Silicon Valley Bank highlights the risks associated with investing in the tech industry, particularly for banks that focus heavily on this sector. The bank's reliance on deposits from startups and investors meant that it was particularly vulnerable to changes in the tech sector, which can be unpredictable and volatile.

This event also underscores the importance of banks having diversified portfolios that can withstand fluctuations in specific industries or sectors. Having a range of investments can help mitigate risks and ensure that banks are better prepared for economic downturns.

The value of Silicon Valley Bank's significant bond portfolio was negatively impacted by increasing interest rates, highlighting the need for the bank to acquire fresh capital. To this end, the bank enlisted the services of Goldman Sachs Group Inc. earlier this week to conduct a private sale of stocks. According to an individual knowledgeable about the offering, the bank intended to announce the sale only after it was completed to avoid alarming investors.

However, Moody's Investors Service informed Silicon Valley Bank that it intended to lower the bank's credit ratings, a move that can make it more challenging for institutions to acquire financing. As per its usual practice, Moody's provided the bank with 24 hours' notice before making the credit rating change.

The looming downgrade from Moody's likely made it even more difficult for Silicon Valley Bank to find buyers for its shares, and the bank was forced to cancel the share sale. The bank's management was reportedly in discussions with regulators and potential buyers in an attempt to find a solution to the liquidity crisis, but it was ultimately unable to avoid collapse.

The collapse of Silicon Valley Bank is a significant event for the tech industry and for the wider financial sector. It demonstrates the potential risks associated with investing heavily in a specific industry or sector, particularly one as volatile as tech. The collapse also underscores the importance of financial institutions having diversified portfolios and adequate risk management strategies in place.

The Federal Deposit Insurance Corporation (FDIC) has taken control of Silicon Valley Bank's assets, and the bank's deposits have been transferred to a new entity called the Deposit Insurance National Bank of Santa Clara. The FDIC has assured depositors that their deposits remain safe and accessible. However, the failure of a major bank like Silicon Valley Bank can have ripple effects throughout the financial system and the wider economy.

According to an individual familiar with the matter, banking professionals and Silicon Valley Bank executives were concerned that a downgrade would be more detrimental to the bank than a share sale. They worked quickly to secure the support of private-equity firm General Atlantic, which pledged to commit $500 million to the deal. The planned share sale was then announced after the markets closed on Wednesday. However, Moody's downgraded the bank later that night.

When trading began on Thursday, SVB's shares plummeted sharply. The sudden and severe drop in the stock price caused unease among customers, who started withdrawing their funds from the bank to avoid the possibility of incurring losses in the event of a collapse.

The run on deposits continued through Friday, and despite SVB's efforts to find a buyer, regulators closed the bank and transferred its deposits to the Deposit Insurance National Bank of Santa Clara, a new entity created by the Federal Deposit Insurance Corporation.

Investors in banks with a similar profile to SVB, such as First Republic Bank and PacWest Bancorp, have also been affected, with shares dropping significantly. First Republic Bank, which caters to wealthy individuals and businesses, has seen its shares fall about 30% since Wednesday. PacWest Bancorp, whose lending portfolio is heavily tied to real estate and venture capital firms, has seen a 54% drop in its shares in the past two days.

SVB's collapse is notable because it is the largest bank failure since the 2008 financial crisis, second only to the collapse of Washington Mutual Inc. with assets of $307 billion. SVB was the 16th largest bank in the US, with $209 billion in assets as of Dec. 31, 2022. The bank's deposit base grew rapidly, rising 86% in 2021 to $189 billion before peaking at $198 billion in the following quarter. The bank invested heavily in US Treasuries and government-sponsored debt securities, but rising interest rates, coupled with a slowdown in new investment, drained the bank's deposits faster than expected.

Other banks were inundated with inquiries from prospective clients seeking to transfer their funds.

On Thursday, while attending a meeting, Alison Greenberg, co-founder of a Los Angeles-based maternity care startup called Ruth Health, received an urgent email from one of their seed investors, warning her of the situation at SVB. Ms. Greenberg said, “The email simply stated that things were falling apart at SVB and that we urgently needed to withdraw our money.”

Audrey Wu, another co-founder of Ruth Health, began making transfers of varying amounts from the company's account, in the hopes of avoiding triggering any automatic systems that might flag the transactions and potentially cause delays.

Other SVB clients also reported similar experiences. Some said they were alarmed by the abruptness of the collapse and struggled to access their funds.

The bank's sudden collapse has raised questions about whether the tech industry's growth is sustainable and whether other banks serving the sector are also vulnerable.

The FDIC has said it plans to sell the bank's assets to other financial institutions, with the aim of minimizing the impact on customers. Meanwhile, SVB Financial has said it is committed to working with regulators to ensure a smooth transition for its clients.

While Audrey Wu was in the process of transferring funds out of Ruth Health's account, she encountered a problem: SVB's website crashed, and she couldn't log back in. The bank's stock plummeted by over 60% to $106.04 on Thursday. Goldman Sachs had arranged a private stock sale for SVB at $95 per share, but as the stock continued to decline and more customers withdrew their deposits, the sale fell through, according to sources familiar with the matter.

The bank ultimately failed to secure a buyer, and on Friday, regulators closed the bank and took control of it. The FDIC said all of the bank’s deposits have been transferred to the new entity it created, called the Deposit Insurance National Bank of Santa Clara. The collapse of SVB marks the second-largest bank failure in U.S. history after the 2008 crisis-era collapse of Washington Mutual Inc. The incident has also sparked concerns among investors about other banks catering to the startup ecosystem. Shares of San Francisco-based First Republic Bank have fallen about 30% since Wednesday, while shares of PacWest Bancorp have fallen 54% in the past two days.

In an attempt to boost support for the bank, some backers made efforts to encourage others to keep their money at SVB. One of such supporters, financial-technology investor Restive Ventures, urged its portfolio companies to do the same and stated that it would maintain its funds at SVB. According to an email sent early Friday morning, the firm expressed concerns about moving corporate treasury online under time pressure, saying it was a recipe for disaster.

However, a few hours later, the planned share sale was called off. The bank also instructed its staff to work from home on Friday and until further notice, according to an email seen by The Wall Street Journal. But before 9 a.m. on the West coast, regulators had stepped in and taken over the bank.

SVB’s failure marks the first bank failure since 2020 and could signal a test for regulators who have been under pressure to show they are prepared for another crisis. It could also serve as a warning to other banks that cater to startups and the tech industry, as rising interest rates and a potential economic downturn could lead to similar issues.

For now, the FDIC is in control of SVB and says it will work to find a buyer for the bank. Depositors’ money is insured by the FDIC, so they should not lose any funds. However, it remains to be seen what will happen to SVB’s shareholders and bondholders.

The collapse of SVB is a stark reminder that no bank is too big to fail, even in a sector as profitable as tech. As the tech industry continues to grow and thrive, it will be interesting to see what impact SVB’s failure will have on the industry and its relationship with the banking sector.

On Friday morning, more than 24 individuals, including some who identified themselves as customers, gathered at the bank's headquarters in Santa Clara. A press release from the FDIC announcing the bank's closure was affixed to a locked door at the premises.

During a phone call, one customer acknowledged that they were in a significant predicament, stating, "We are in a whole lot of trouble right now," and adding that they should not have concentrated all their funds in one bank.

Customers and investors expressed shock and frustration at the sudden collapse of SVB, which had been seen as a linchpin of the Silicon Valley startup scene. Some worried about the safety of their deposits and the future of the tech industry without SVB's support.

The FDIC said it had transferred SVB's deposits to another bank, but some customers said they had yet to receive access to their funds. Meanwhile, some investors were left with worthless shares in the bank, which is unlikely to return any capital to shareholders.

The collapse of SVB is expected to have a ripple effect throughout the tech industry, potentially slowing down the pace of new startups and venture capital investment. It also raises questions about the safety and stability of other banks that rely heavily on deposits from the tech industry.

Jack Singh, an adviser at Avahi Inc., which provides startup consulting services for Amazon Web Services, said they began attempting to transfer funds from their SVB account to a JPMorgan Chase & Co. account on the previous day, but some of the transfers had not yet gone through by the next morning. He visited SVB's headquarters to see if he could withdraw even $40,000 or $50,000 to make payroll. According to Mr. Singh, there are individuals who depend on the money in the bank, and he anticipates receiving calls from employees as everything is currently at a standstill due to the bank's closure.

Other customers expressed similar concerns about their ability to access their funds and pay their employees. Some were frustrated by the lack of information and communication from the bank.

“I have a small business, and it’s really frustrating not knowing what’s going on,” said one customer who declined to be identified. “I have employees to pay and bills to pay, and I can’t even get a straight answer from the bank.”

The closure of SVB marks the largest bank failure since the start of the pandemic, and underscores the risks inherent in the fast-growing and rapidly evolving world of fintech. Regulators have been closely scrutinizing the industry, particularly the rise of so-called neobanks that offer digital-only banking services. Critics have raised concerns about the safety and soundness of these firms, particularly in the event of an economic downturn or other adverse events.

The FDIC said it would mail checks to depositors for the amount of their insured funds, and encouraged customers to visit its website for more information. It also said it had entered into a purchase and assumption agreement with an unnamed institution to assume all of SVB’s deposits.

Full credit to the Wall Street Journal and CNBC

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