The assets of one of Silicon Valley’s top banks were seized by regulators on Friday, marking the largest failure of a U.S. financial institution since the height of the financial crisis nearly 15 years ago.
Silicon Valley Bank, the nation’s 16th-largest bank, failed this week after depositors rushed to withdraw funds amid concerns about the bank’s health. After the failure of Washington Mutual in 2008, it was the second-largest bank failure in US history.
The bank primarily served technology workers and venture capital-backed businesses, including some of the industry’s most well-known brands.
“This is an extinction-level event for startups,” Garry Tan, CEO of Y Combinator, launched Airbnb, DoorDash, and Dropbox and has referred hundreds of entrepreneurs to the bank, told the Associated Press.
“I’ve heard from hundreds of our founders asking for advice on how to get through this. They’re wondering, ‘Do I have to furlough my employees?'”
There appeared to be little chance of the chaos spreading throughout the banking sector, as it did in the months preceding the Great Recession. The largest banks were most likely to cause an economic meltdown to having strong balance sheets and ample capital.
Silicon Valley Bank customers
According to the bank’s website, nearly half of the U.S. technology and healthcare companies that went public last year after receiving early funding from venture capital firms were Silicon Valley Bank customers.
The bank also boasted of its connections to leading technology companies such as Shopify, ZipRecruiter, and Andreesson Horowitz, one of the top venture capital firms.
Tan estimates that nearly one-third of Y Combinator startups will be unable to make payroll within the next month if they cannot access their funds.
Roku, an Internet TV provider, was one of the victims of the bank’s demise. It disclosed in a regulatory filing on Friday that Silicon Valley Bank held approximately 26% of its cash, or $487 million.
Roku stated that its deposits with SVB were largely uninsured and did not know “to what extent” it could recover them.
As part of the seizure, California bank regulators and the FDIC transferred the bank’s assets to the Deposit Insurance Bank of Santa Clara, a newly formed institution. On Monday, the new bank will begin paying out insured deposits. The FDIC and California regulators intend to sell the remaining assets to make other depositors whole.
Attempting to raise capital
The banking sector has been in turmoil all week, with shares falling by double digits. Then, on Friday, news of Silicon Valley Bank’s troubles pushed shares of almost all financial institutions even lower.
The failure struck with lightning speed. According to some industry analysts, the bank is still a good company and a wise investment. Meanwhile, executives at Silicon Valley Bank were attempting to raise capital and find new investors. However, extreme volatility halted trading in the bank’s shares before the stock market opened.
The FDIC decided to close the bank shortly before noon. Notably, as is customary, the agency did not wait until the end of the business day. The FDIC could not immediately find a buyer for the bank’s assets, indicating how quickly depositors cashed out.
Treasury Secretary Janet Yellen is “watching closely,” according to the White House. The administration attempted to reassure the public that the banking system is in much better shape than it was during the Great Recession.
“Our banking system is fundamentally different than it was a decade ago,” said Cecilia Rouse, chair of the White House Council of Economic Advisers. “The reforms implemented at the time provide the kind of resilience that we’d like to see.”
After the value of mortgage-backed securities linked to ill-advised housing loans collapsed in 2007, the world experienced the worst financial crisis since the Great Depression. The Wall Street panic caused the demise of Lehman Brothers, a firm founded in 1847. Because major banks were so intertwined, the crisis caused a cascading breakdown in the global financial system, putting millions out of work.
According to the FDIC, Silicon Valley Bank, based in Santa Clara, California, had $209 billion in total assets at the time of its failure. It was unclear how many of its deposits exceeded the $250,000 insurance limit, but previous regulatory reports showed that many accounts did.
On Thursday, the bank announced plans to raise $1.75 billion to strengthen its capital position. This frightened investors and shares fell 60%. They fell even further before the opening of the Nasdaq, where the bank’s shares were traded.
As the name suggests, Silicon Valley Bank was a major financial conduit between the technology sector, startups, and tech workers. If a startup founder wanted to find new investors or go public, establishing a relationship with a bank was thought to make good business sense.
Founded in 1983 during a poker game by co-founders Bill Biggerstaff and Robert Medearis, the bank leveraged its Silicon Valley roots to become a financial cornerstone in the tech industry.
Bill Tyler, CEO of TWG Supply in Grapevine, Texas, said he first noticed something was wrong when one of his employees texted him at 6:30 a.m. Friday to complain about not receiving their paychecks.
TWG, which has only 18 employees, had already sent the check money to a payroll services provider that used Silicon Valley Bank. Tyler was trying to figure out how to pay his employees.
“We’re waiting on about $27,000,” he explained. “It’s already a late payment. It’s already an awkward situation. I don’t want to ask any of my employees, “Hey, can you wait until next week to get paid?”
Silicon Valley Bank’s ties to the technology sector exacerbated its problems. After a growth surge during the pandemic, technology stocks have taken a beating in the last 18 months, and layoffs have spread throughout the industry. Venture capital funding is also on the decline.
At the same time, the Federal Reserve’s fight against inflation and an aggressive series of interest rate hikes to cool the economy weighed heavily on the bank.
The value of generally stable bonds begins to fall as the Fed raises its benchmark interest rate. That is not usually a problem, but when depositors become concerned and withdraw their funds, banks may be forced to sell those bonds before they mature to cover the departure.
That is precisely what happened to Silicon Valley Bank, which was forced to sell $21 billion in highly liquid assets to cover the unexpected withdrawals. It suffered a $1.8 billion loss on the sale.
Ashley Tyrner, CEO of FarmboxRx, said she had spoken with several friends whose businesses are venture-backed. She described them as “beyond themselves” after the bank’s failure. Tyrner’s chief operating officer attempted to withdraw funds from her company on Thursday but could not do so in time.
“One friend said they couldn’t make payroll today and cried because they had to notify 200 employees,” Tyrner said.
