May 21, 2024

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Silicon Valley Bank: Regulators take charge as failure raises concerns

Silicon Valley Bank: Regulators take charge as failure raises concerns

  • Written by Natalie Sherman and James Clayton
  • BBC News

US regulators shut down Silicon Valley Bank (SVB) and took control of customer deposits in the biggest failure of a US bank since 2008.

The moves came as the company, a major technology lender, was struggling to raise cash to bridge a loss from selling assets affected by high interest rates.

Its troubles have led to a rush of customer withdrawals and raised concerns about the state of the banking sector.

Officials said they acted to “protect insured depositors”.

Banking regulators in California, where the company is headquartered, said the Silicon Valley bank faced “liquidity shortages and bankruptcies.” announced the acquisition.

The Federal Deposit Insurance Corporation (FDIC), which typically protects deposits of up to $250,000, He said It has taken on about $175 billion (£145 billion) in deposits held at the bank, the 16th largest in the US.

It added that the banks’ offices will open and customers with insured deposits will have access to the funds “no later than Monday morning,” adding that the money raised from the sale of the bank’s assets will go to uninsured depositors.

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With many of the company’s clients in this position, this situation left many companies tied up with money in the bank worried about their future.

image source, Getty Images

photo caption,

Silicon Valley Bank (SVB) offices were closed as customers sought to get their money

“Three days ago, we just got $1 million in our bank account…then this happens,” said another founder of a healthcare startup.

Transfer money to a different account 40 minutes before the deadline. “She was hanging on. Then this morning, she was there. But I know other people who did the same thing minutes later, and it didn’t move.”

“It was crazy,” he said.

regulator response

The collapse came after SVB said it was trying to raise $2.25bn (£1.9bn) to bridge the loss caused by the sale of assets, mainly US government bonds, which had been affected by rising interest rates.

The news caused investors and customers to flee the bank. Shares experienced their biggest one-day drop ever on Thursday, plunging more than 60% and plunging further into after-hours sales before trading halted.

Concerns that other banks may face similar problems led to a broad sell-off in banking stocks globally on Thursday and Friday morning.

Speaking in Washington on Friday, US Treasury Secretary Janet Yellen said she was watching “recent developments” at the Silicon Valley bank and others “very carefully.”

It later met with senior banking regulators, with the Treasury saying it expressed “full confidence in banking regulators to take appropriate action in response, and noted that the banking system remains resilient.”

image source, Getty Images

photo caption,

Janet Yellen expressed confidence in the resilience of the banking sector

The company is an important lender to early-stage companies, and is the banking partner for nearly half of the US venture-backed technology and healthcare companies that listed on stock markets last year.

The company, which began as a California bank in 1983, has expanded rapidly over the past decade. It now employs more than 8,500 people globally, although most of its operations are in the United States.

But the bank is under pressure, as high rates make it harder for startups to raise money through private fundraising or stock sales, and more customers withdraw deposits, moves that doubled this week.

In Silicon Valley, echoes of the crash spread far and wide as companies faced questions about what the crash would mean for their finances.

Even companies without direct business were affected, such as customers of Rippling, a company that handles payroll software and has used SVB. It warned that existing payments could face delays and said it would shift its business to another bank.

UK subsidiary SVB said it would enter bankruptcy from Sunday evening.

The Bank of England said Silicon Valley UK would stop making payments or accepting deposits in the meantime, and the move would allow individual depositors to pay up to £85,000 from the UK’s Deposit Insurance Scheme.

“SVBUK has a limited presence in the UK and there are no significant functions supporting the financial system,” the Bank of England added.

image source, Getty Images

photo caption,

Silicon Valley Bank, led by President Gregory Baker, has catered to the technology industry and has expanded rapidly over the past decade

Central banks around the world – including the US Federal Reserve and the Bank of England – have raised borrowing costs sharply over the past year in an effort to rein in inflation.

But as interest rates rise, the value of existing bond portfolios usually declines.

These declines mean that many banks are incurring potentially large losses – although a change in value would not usually be a problem unless further pressure forces companies to sell their holdings.

Stocks in some major US banks rebounded on Friday, but the sell-off continued to weigh on smaller companies, forcing names like Signature Bank and others to halt trading.

The tech-savvy Nasdaq ended the day 1.7% lower, while the S&P 500 fell 1.4% and the Dow closed down 1%.

European and Asian indices also closed lower, with the FTSE 100 down 1.6%.

Banks specializing in individual industries are seen as vulnerable to flash draws, like the one that hit SVB, said Alexander Yocum, an equity research analyst at CFRA.

“The Silicon Valley bank wouldn’t be losing money if it didn’t run out of cash to give back to its customers,” he said. “The problem was that people wanted the money and they didn’t have it — they invested the money and those investments fell through.”

“I know there’s a lot of fear out there, but it’s definitely company-specific,” he said.

“The average person should be fine,” he added, but said tech companies are likely to find it more difficult to raise money. He said, “It’s not good.”