By Bryan Jung
The Federal Deposit Insurance Corporation (FCIC) has assumed control of Silicon Valley Bank (SVB) to protect depositors from losing all of their money after it was closed by the California Department of Financial Protection and Innovation.
Federal banking regulators on March 10 took custody of the country’s 16th largest bank, which was a top lender for American tech and life sciences firms and start-ups, according to a press release.
The collapse of the California bank is the largest bank failure since Washington Mutual in 2008, during the last major bank crisis.
The FDIC set up a so-called bridge bank, the Deposit Insurance National Bank of Santa Clara (DINB), and as the receiver, transferred all of the insured deposits of SVB there and so all insured assets, up to the $250,000 coverage limit, are safe and will be accessible to depositors starting March 13.
Although the main office and all branches of SVB will reopen at the beginning of next week, the DINB will now control and manage its operations.
The official coverage limit is $250,000 per depositor, per insured bank, for each account ownership category, so some depositors could potentially have more than $250,000 insured.
However, the FDIC added that it “will pay uninsured depositors an advance dividend within the next week” and will receive a receivership certificate for the remaining amount of their uninsured funds.
Future dividend payments may be made to uninsured depositors, while the FDIC sells off the assets of SVB.
“The failure of @SVB_Financial could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash,” warned Pershing Square CEO Bill Ackman in a tweet just before the bank failure.
Silicon Valley Lender Was In Trouble For Some Time
It is unverified how much money was pulled out of SVB yesterday after its announcement of a $2.25 billion share sale plan sparked a run on the bank.
The massive interest rate hikes over the past year have caused the value of its bonds to fall, particularly those that take many years to mature, and forced the bank to reinvest the proceeds from its sales into shorter-term assets.
SVB suffered significant losses on its portfolio, which was heavily invested in U.S. Treasuries and mortgage-backed securities, all of which have taken a beating.
The bank’s shares fell more than 60 percent after its March 8 announcement, wiping out $9.4 billion in market value.
Executives publicly stated that they would dump $21 billion worth of holdings at a $1.75 billion loss, while raising $500 million from venture firm General Atlantic to cover rapidly declining customer deposits and bond losses to save the firm.
General Atlantic has yet to make a comment, only hours after announcing an agreement to invest $500 million in the now-failed bank.
SVB CEO Greg Becker told clients earlier this week to “stay calm. That’s my ask. We’ve been there for 40 years, supporting you, supporting the portfolio companies, supporting venture capitalists.”
However, many depositors, along with many of their venture capital backers, panicked and pulled their money out anyway.
Top venture capital firms like Coatue and Founders Fund encouraged portfolio companies to strongly consider pulling money out of SVB, while Sequoia Capital reiterated its diversification strategy after concerns grew over the bank’s stability.
The California lender had approximately $209 billion in total assets and $175 billion in deposits at the end of 2022.
However, the FDIC said that its current deposit total at this time is “undetermined.”
The amount of insured and uninsured deposits was undetermined at the time of closing and will be determined once the FDIC obtains additional information from the bank and customers.
Economists Hope Fed Will Slow Down Interest Rate Hikes After Bank Failure.
The news of SVB’s failure may cause banks to be more reluctant to offer loans, including rival lenders that are flush with new deposits.
Some economists hope that the news will discourage the Federal Reserve from raising interest rates higher.
The number of investors saying that the likelihood of the central bank would enact a 50-basis-point rate increase, declined today, but the February jobs report could be another factor.
“Lots of chatter today about the possibility of generalized U.S. banking system stress due to SVB troubles. Three summary things on this: While the U.S. banking system as a whole is solid, and it is, that does not mean that every bank is,” stated economist Mohamed A. El-Erian in a tweet.
“Due to the volatility in yields after the prior protracted period of leverage-enabling policy, the most vulnerable currently are those vulnerable to both interest rate and credit risk. Contagion risk and the systemic threat can be easily contained by careful balance sheet management and avoiding more policy mistakes,” he added.