Silicon Valley Bank collapse has taken the banking industry by surprise. This bank is one of the largest lenders to the tech industry, which has been shut down by regulators after a massive bank run that drained its cash reserves.
According to a regulatory filing, investors and depositors tried to withdraw $42 billion from the bank on Thursday, March 9, 2023, following a letter from the bank’s CEO that revealed a huge loss and a need for more capital.
But the customers got a sigh of relief as in a tweet SVB said it has been acquired by HSBC UK and operations have resumed in normal fashion from 13th March 2023.
The letter, sent by SVB CEO Greg Becker to shareholders on Wednesday, March 8, 2023, disclosed that the bank had suffered a $1.8 billion loss on the sale of US treasuries and mortgage-backed securities due to rising interest rates. The letter also announced a plan to raise $2.25 billion of capital through a rights offering and a private placement.
Silicon Valley Bank was hit after massive bank run
The letter triggered a panic among Silicon Valley Bank’s customers, many of whom were venture-capital firms and startups that relied on the bank for financing and banking services. Some of the prominent VC firms that advised their portfolio companies to pull their money from SVB included Peter Thiel’s Founders Fund, Coatue Management, Union Square Ventures and Founder Collective.
The scale of attempted withdrawals was so large that SVB ran out of cash and ways to get it. When the Federal Reserve sent its cash letter – a list of checks and other transactions for the bank to process – to SVB on Thursday morning, it failed to pull together enough currency to meet it. The California Department of Financial Protection and Innovation (DFPI), which oversees state-chartered banks like SVB, said that despite attempts from the bank and regulators to transfer collateral from various sources, SVB did not meet its cash letter with the Fed.
“Despite being in sound financial condition prior to Thursday,” DFPI Commissioner Clothilde Hewlett said in an order taking possession of SVB on Friday evening, “the run caused the bank to be incapable of paying its obligations as they come due.” The order declared SVB insolvent and placed it into receivership by the Federal Deposit Insurance Corporation (FDIC).
This is the biggest failure of a US bank since Washington Mutual collapsed in 2008 during the global financial crisis. It is also a major blow to Silicon Valley’s tech ecosystem, which has relied on SVB for decades as a source of funding and banking services. According to its website, SVB had more than $200 billion in assets under management as of December 31st 2022.
The FDIC said in a statement that it will sell most of Silicon Valley Banks’s assets and liabilities to another financial institution as soon as possible. It also assured depositors that their money is safe up to $250000 per account under FDIC insurance coverage.
“The FDIC will continue working with our state partners at DFPI,” FDIC Chairman Jelena McWilliams said in a statement. “We are committed to ensuring an orderly resolution process that protects depositors’ interests while minimizing disruptions for customers.”