Silicon Valley Bank collapses, with repercussions in the U.S. and abroad

Silicon Valley Bank was surprisingly short of liquidity. The California Department of Financial Protection and Innovation appointed the Federal Deposit Insurance Corporation as the depositary for the bank’s funds.

U.S. authorities closed Silicon Valley Bank (SVB) on Friday, March 10 to protect its customers’ deposits and will reopen the institution on Monday under federal control, official sources reported, amid fears of contagion of the bank’s problems to the rest of the banking sector.

The bank, which has been working with the technology sector since the 1980s, was surprisingly short of liquidity.

The California Department of Financial Protection and Innovation (DFPI) closed SVB and appointed the Federal Deposit Insurance Corporation (FDIC) as depositary for the bank’s funds, the federal agency said Friday.

DFPI “took possession of Silicon Valley Bank, citing inadequate liquidity and insolvency,” the California agency said.

The bank’s 17 branches will reopen Monday under the control of a new entity specifically created by the FDIC to manage the institution’s operations.

In the short term, customers will be able to withdraw up to $250,000. Customers with more money in the bank, which is the vast majority, were invited to contact the FDIC.

SVB is the first institution with deposits guaranteed by the federal corporation to fail since 2020, according to the FDIC.

It is also the largest bank failure in the United States since the 2008 crisis by asset size.

The situation raises fears among investors that other banks could run into trouble amid an escalation of interest rates by central banks to contain inflation.

The authorities’ decision protects clients’ holdings and buys time to find potential buyers for the failed institution’s assets.

Technological bench

Silicon Valley Bank (SVB) was a Californian bank specializing in the technology sector, doing business primarily with funds that invest in unlisted companies.

Little known to the public, it was the sixteenth largest U.S. bank by asset size.

The firm, which operated in the United States, Europe, Asia and Israel, offered financial services to start-ups, among others, ranging from simple bank accounts to advice on capitalization.

Closely linked to technology companies, SVB suffered from the deterioration of the sector: the sharp rise in interest rates in the United States, affecting an industry highly dependent on financing for growth, coupled with difficulties in the supply of semiconductors and weak investor appetite for technology stocks, marked the end of the post-pandemic technology euphoria.

Panic set in after the bank’s parent, SVB Financial Group, announced it would attempt to raise $2.25 billion in fresh funds.

The group quickly sold a $21 billion portfolio of financial securities at an estimated loss of $1.8 billion.

SVB was seeking to strengthen its finances, fragile due to customer withdrawals.

According to the specialized economic channel CNBC, the bank failed to raise the necessary capital and was negotiating its sale to another bank before the announcement by the regulatory authorities.

Financial sector shocked by bankruptcy

SVB’s difficulties went beyond the country’s borders and shocked the global banking sector, which was taken by surprise.

At the end of 2022, the bank had $209 billion in assets and about $175.4 billion in deposits, officials said.

Treasury Secretary Janet Yellen met Friday with financial regulators to discuss SVB’s situation and said the banking system “remains resilient and regulators have effective tools to address this type of event,” according to a Treasury Department statement.

The four largest U.S. banks lost $52 billion on the stock market on Thursday alone, and the move also affected Asian and European banks, which posted sharp losses in market capitalization.

Wall Street ended lower on Friday, strongly impacted by this case. The Dow Jones lost 1.07%, the tech-heavy Nasdaq 1.76% and the broader S&P 500 index 1.45%.

SVB’s difficulties virtually coincided with Wednesday night’s announcement of the liquidation of Silvergate Bank, a banking institution particularly active in the troubled cryptocurrency sector.

Since the 2008-2009 financial crisis and the failure of Lehman Brothers, banks are regularly stress-tested and must provide assurances to regulators of their ability to respond to stressful situations.

Updated date

Article publidhed on March 11, 2023 by Josh Smith

Last Update March 11, 2023 by Josh Smith