SANTA CLARA, Calif.—Silicon Valley Bank collapsed Friday in the second-biggest bank failure in U.S. history after a run on deposits doomed the tech-focused lender’s plans to raise fresh capital.
The Federal Deposit Insurance Corp. said it has taken control of the bank via a new entity it created called the Deposit Insurance National Bank of Santa Clara. All of the bank’s deposits have been transferred to the new bank, the regulator said.
Insured depositors will have access to their funds by Monday morning, the FDIC said. Depositors with funds exceeding insurance caps will get receivership certificates for their uninsured balances, meaning businesses with big deposits stuck at the bank are unlikely to get their money out soon.
The bank is the 16th largest in the U.S., with some $209 billion in assets as of Dec. 31, according to the Federal Reserve. It is by far the biggest bank to fail since the near collapse of the financial system in 2008, second only to the crisis-era collapse of Washington Mutual Inc.
The bank’s parent company, SVB Financial Group, was racing to find a buyer after scrapping a planned $2.25 billion share sale Friday morning. Regulators weren’t willing to wait. The California Department of Financial Protection and Innovation closed the bank Friday within hours and put it under the control of the FDIC.
Customers tried to withdraw $42 billion—about a quarter of the bank’s total deposits—on Thursday alone, the California regulator said in a filing Friday. The flood of withdrawals destroyed the bank’s finances; at close of business Thursday, it had a negative cash balance of nearly $1 billion and couldn’t cover its outgoing payments at the Fed, according to the filing.
The bank was in sound financial condition on Wednesday, the regulator said. A day later, it was insolvent.
SVB’s troubles have dragged down a wide swath of the industry. Investors dumped the shares of banks big and small on Thursday, shaving $52 billion off the value of the four largest U.S. banks alone. The megabanks recovered Friday but many of their smaller peers continued to plunge. Several were halted for volatility.
Investors are worried about banks with a similar profile to SVB. Shares of San Francisco-based First Republic Bank, which caters to businesses and wealthy individuals, have fallen about 30% since Wednesday. “First Republic’s deposit base is strong,” the bank said Friday.
Shares of PacWest Bancorp have fallen 54% in the past two days. More than two-thirds of its lending portfolio is tied to real estate, with a sizable portion lent to venture-capital firms.
SVB catered mainly to the insular ecosystem of startups and the investors that fund them. Its deposits boomed alongside the tech industry, rising 86% in 2021 to $189 billion and peaking at $198 billion a quarter later. The bank poured large amounts of the deposits into U.S. Treasurys and other government-sponsored debt securities.
Tech tumbled after the Federal Reserve began raising rates last year to curb inflation. Startups, as a result, drained their deposits with SVB faster than the bank expected. And new investment stalled, meaning fresh money wasn’t coming into the bank.
Rising interest rates, meanwhile, dented the value of SVB’s massive bond portfolio. The bank needed fresh capital.
SVB hired Goldman Sachs Group Inc. earlier this week to execute a private stock sale, with plans to announce it upon completion to avoid spooking investors, according to a person familiar with the offering.
Then Moody’s Investors Service informed SVB that it planned to downgrade the bank’s credit ratings, the person said. As a practice, Moody’s informs issuers 24 hours in advance of a credit rating change.
SVB Chief Executive Greg Becker had told customers the bank was on solid financial footing.Photo: Lauren Justice/Bloomberg News
Bankers and SVB executives feared a downgrade would harm the company more than a share sale, the person close to the deal said. They scrambled to bring on private-equity firm General Atlantic to anchor the deal with a $500 million commitment and announced the planned sale after the market closed Wednesday. Moody’s downgraded the company later that evening.
SVB shares fell sharply after the market opened Thursday. The violent move in the stock alarmed customers, who began pulling their money out of the bank to avoid getting stuck with losses in the event of a failure.
Chief Executive Greg Becker tried to reassure customers on a call Thursday, telling them the bank was on solid financial footing despite the losses. It didn’t work. Venture-capital investors advised startups to pull their money out of the bank to avoid losses on deposits in excess of FDIC’s $250,000 insurance cap. The bank had more than $151 billion worth of deposits that were over the FDIC limit at the end of 2022.
Rival banks were flooded with calls from potential customers looking to move their balances.
Alison Greenberg, co-founder of Los Angeles-based maternity care startup Ruth Health, was in a meeting Thursday when she got a frantic email from a seed investor.
“It basically just said ‘Things are imploding at SVB, it’s urgent that you get your money out,’” Ms. Greenberg said.
Audrey Wu, a Ruth Health co-founder, began making transfers out of the company’s account of different denominations, hoping not to trip up any automated systems that would flag the transactions and potentially delay them.
As she prepared to carry out the final transfer from the account, SVB’s website crashed and she couldn’t log back in, she said.
SVB’s stock fell more than 60% to $106.04 Thursday.
Goldman bankers arranged for SVB to sell shares at $95 apiece on Thursday afternoon, according to people familiar with the offering. As the stock kept tumbling and more customers pulled their deposits from the bank, that deal fell apart, these people said.
The collapse of Silicon Valley Bank is the second-largest bank failure in U.S. history.Photo: David Paul Morris/Bloomberg News
Some supporters tried to rally support for the bank. Financial-technology investor Restive Ventures said in an email early Friday morning that it was keeping its money at SVB and encouraging portfolio companies to do the same. “Moving corporate treasury under time pressure, on the internet, is a recipe for disaster,” the email said.
The share sale was canceled a few hours later. The bank told employees to “work from home today and until further notice,” according to a copy of the email viewed by The Wall Street Journal.
Before 9 a.m. on the West coast, regulators had seized the bank.
More than two dozen people, some who identified themselves as customers, descended on the bank’s Santa Clara headquarters Friday morning. An FDIC press release announcing the bank’s closure was taped to a locked door.
“We are in a whole lot of trouble right now,” one customer said on a phone call. “We shouldn’t have had all our eggs in one basket,” he added.
Jack Singh, adviser at Avahi Inc., a startup consulting partner for Amazon Web Services, Amazon.com Inc.’s cloud-computing arm, said the firm had started trying to send wire transfers from SVB to an account at JPMorgan Chase & Co. Thursday. As of Friday morning, some of those transfers hadn’t gone through. He showed up at the bank’s headquarters to see if he could withdraw even $40,000 or $50,000.
Mr. Singh said he has payroll to make. “There are individuals who rely on the money that’s being held in the bank,” he said, adding “It’s Friday and everything is just paused. So definitely we’re going to start getting calls from employees.”
His 6-year-old son overheard a conversation he was having with an accountant about the situation, Mr. Singh said. The boy pulled out his wallet and tried to give his father a few dollars.
https://www.wsj.com/articles/svb-financial-pulls-capital-raise-explores-alternatives-including-possible-sale-sources-say-11de7522
Someone must have snitched on them, usually no one will bother to check.
