measured by sheer speed and violence, the astonishing crash of Silicon Valley Bank Even those that have been left out have gone through decades of ups and downs in the market. On Wednesday, SVB was a 40-year-old Valley institution, quietly banking (by some estimates) half of the Valley’s startups. By Friday, it was done, shut down by California regulators. Now startups, VCs and analysts are coming together to see how the bank was run, why no one could stop it, and who is at risk next.
How did Silicon Valley Bank run?
SVB Financial, parent company of troubled Silicon Valley Bank, surprised many announced Planning March 8 to strengthen your financial position. SVB said it sold a securities portfolio of about $21 billion at a loss of about $2 billion. SVB also said it is looking to raise $2.25 billion by offering $1.75 billion in a share sale. General Atlantic, a private equity firm, also agreed to buy $500 million in stock. Goldman Sachs Acted as underwriter on $2.25 billion of stock sales but not securities portfolio transactions. SVB said in a $2.25 billion stock sale ended March 10 statement, Goldman and General Atlantic declined to comment.
The attempted stock sale spooked the venture community, with several funds withdrawing their money from SVB. For example, Peter Thiel’s Founders Fund, Union Square Ventures and Coatue Management asked their companies to move their money out of SVB to avoid being caught in a potential bank failure, CNBC reported, Investors and depositors ended up withdrawing $42 billion in deposits from SVB, causing the bank to end March 9 with a negative cash balance of approximately $958 million. March 10 filing From the Commissioner for Financial Security and Innovation. SVB stock fell 60%, closing Thursday at $106.04. Founders Fund and Union Square did not respond to messages for comment. Coatue declined to comment. SVB did not respond to messages for comment.
It was rumored on Friday that SVB is looking for a buyer. However, large banks were not expected to be interested in SVB due to its loan portfolio, which is heavily skewed towards VCs. Venture or private equity funds will make up about 56% of the company’s global banking portfolio in 2022. 2022 Annual Report, Luck informed of.
California’s Department of Financial Protection and Innovation closed SVB on Friday, appointing the Federal Deposit Insurance Corp. as receiver. The FDIC created the Deposit Insurance National Bank of Santa Clara, a temporary bank. As receiver, the FDIC will dispose of the SVB assets, according to a statement, nasdaqwhich considers an FDIC receivership to be the functional equivalent of bankruptcy, Stopped SVB’s stock on Friday.
According to the FDIC, SVB had $209 billion in assets as of December 31. This means that SVB is the biggest bank failure since 2008, when Washington Mutual collapsed. $307 billion in assets, JP Morgan buys WaMu for $1.9 billion. The SVB was still searching for a rescuer as of Friday afternoon. A deal may involve selling company assets piecemeal or as a whole, Bloomberg informed of. The story says the target is to complete a deal by Monday.
Why hasn’t anyone stepped in to save Silicon Valley Bank?
By late Thursday and into Friday morning, there were rumors that a white knight might move to acquire SVB — making it a Merrill Lynch rather than a Lehman moment. At best, it looks like SVB may turn out to be another Washington Mutual. Several banks were expected to be interested in SVB. One venture capital executive said, “SVB has a good balance sheet. Just a sh***y situation with a run.” and VC officer. Other potential bidders included Citi and Wells Fargo, people said. But the buyer was not found till Friday. “The big banks won’t touch [SVB], Too much bad debt risk for the VC world,” pointed out one of the bankers Luck,
It’s 2023. Do regulators have no way of stopping bank runs?
While you might believe there’s an AI bot that could stop the modern bank run, some are arguing the opposite: digital portals for withdrawals and social media fueling panic may have made things much worse, During most previous bank runs depositors had to show up in person (or call afterwards) to at least ask for their money back, which made the process somewhat rushed.
and yes there are many Law governing banks as well as 50 state agencies and several federal agencies. Then there’s the FDIC, which was created in 1933 to insure deposits in American banks and thrifts (up to $250,000 per account holder) in the event of bank failures. But the main way that regulators try to prevent bank runs is Earlier They are. And a lot of questions will also be asked about the Dodd-Frank Wall Street Reform and Consumer Protection Act, a law that was passed to deter excessive risk-taking after the 2008 financial crisis that led to the bankruptcy of Lehman Brothers and Washington Mutual. Like explosions. Dodd-Frank was enacted to protect against an SVB-type explosion. But smaller banks themselves may be to blame, who, after Dodd-Frank took effect, complained that stricter regulations were too costly for them, according to a report. Federal Reserve Bank of Philadelphia, In 2018, President Donald Trump signed a bill that raised the threshold for companies to qualify as “systemically important financial institutions,” or SIFIs, meaning banks must meet annual stress tests and other regulatory requirements. Will be subject to, $50 billion in assets to $250 billion in assets. SVB CEO Greg Baker urged the government to raise the limit in 2015, they argue Otherwise it would lead to higher cost to customers and “impact our ability to provide credit to our customers,” Bloomberg informed of. SVB had total assets of about $212 billion as of December 2022, up from $56.9 billion at the end of 2018, meaning it was exempt from stricter regulations.
This was followed by the Basel Accords, an international regulatory framework that was developed to ensure that banks hold sufficient cash reserves to meet their financial obligations and survive financial and economic crises. corporate financial institution, In September 2022, the Federal Reserve reaffirmed its commitment Basel III StandardsThis required banks to hold significantly higher capitalization levels and wider liquidity buffers, said a PwC report. European banks were required to implement Basel III but only the largest US banks were subject to the full Basel NSFR requirements. Financial Times said, SVB did not have to comply with Basel III. The bank said in its most recent 10K filing: “Because we are a Category IV organization with less than $250 billion in average total consolidated assets, less than $50 billion in average weighted short-term wholesale funds and $75 in cross-jurisdictional billion activity, we are not currently subject to the Federal Reserve’s LCR or NSFR requirements, either on an absolute or a reduced basis.
academic journals are rife with Material About how the system can better protect against bank runs. But typically the political conversation tends to toggle between ‘we need more regulation’ and ‘regulation is too expensive and stifles competition’.
What can Silicon Valley Bank depositors get back?
According to the Wall Street Journal, nearly all or 89% of SVB’s liabilities are deposits. This is higher than some of the larger banks, such as Bank of America, where 69% of its liabilities are deposited. The lack of an IPO meant that SVB clients were not getting fresh funds through public offerings or fundraising. wall street jayOur channel said. According to SVB, total deposits are set to decline by almost 9% to $173.1 billion at the end of 2022 annual report,
The FDIC said Friday that all insured depositors will have full access to their insured deposits as of the morning of Monday, March 13. However, most of the SVB’s deposits are uninsured. (According to SVB 2022 Annual ReportAs of 31 December, the bank reported $173.1 billion in total deposits. About $151.5 billion, or 88% of total deposits, was uninsured.) The FDIC said it would pay uninsured depositors an advance dividend within the next week. They will also receive a receipt certificate for the balance amount of their uninsured money. Uninsured depositors may also receive future dividend payments as the FDIC sells SVB properties, the statement said.
Who else is at risk?
Just like during the financial crisis in 2008, it looks like many more shoes will drop as infections from SVB spread.
SVB’s collapse affected other banks on Friday, while many larger institutions, whose deposits are more diverse, remained safe, shares of First Republic BankA bank and wealth company with $212.6 billion in total bank assets as of December 31 fell nearly 15% on Friday, while Western Alliance Bancorp, a regional bank holding company with more than $65 billion in assets, declined 21%. On Friday, both the banks tried to pacify the investors. liquidity And Deposit Be strong In contrast, shares of JPMorgan rose more than 3% to close at $133.65, while Bank of America fell 27 cents to $30.27 and Wells Fargo rose 23 cents to $41.36.
According to Dan Dolev, a senior analyst with fintech equity research at Mizuho Securities USA, one consequence of the SVB explosion is its effect on startups that have assets or deposits with the bank. “We don’t know what exposure some startups have,” Dolev said. Etsy, Roku, and Roblox There are only a few companies that have already warned about exposure to SVB.
But as we’ll see in the days and weeks to come, they certainly won’t be the last.
This story was originally featured fortune.com
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