Regulators closed troubled Silicon Valley Bank after deposit outflows and a failed capital raise plunged the country's 16th largest bank into crisis, roiling the larger lending industry.
It became the largest bank to fail since Seattle's Washington Mutual during the height of the 2008 financial crisis and, behind Washington Mutual, the second largest bank failure in U.S. history. It is also the first bank to fail since 2020. Treasury Secretary Janet Yellen acknowledged the industry turmoil Friday, saying there are "a few" banks the department is closely watching.
"There are recent developments that concern a few banks that I'm monitoring very carefully and when banks experience financial loss it is and should be a matter of concern," Yellen told lawmakers Friday.
Silicon Valley Bank's end came Friday when California state regulators seized the Santa Clara institution and appointed the Federal Deposit Insurance Corporation as receiver, meaning the FDIC will be able to sell off assets and return money to insured depositors.
The bank had $209 billion in assets and $175.4 billion in deposits. The FDIC, which serves as a backstop for deposits at U.S. banks up to a limit of $250,000, said all insured depositors would have access to their funds "no later" than Monday morning.
Roughly 87% of Silicon Valley Bank's deposits were uninsured as of December 2022, according to its annual report. Uninsured depositors will receive an advance dividend within the next week and a receivership certificate for the remaining out of their uninsured funds, the FDIC said. It could make future dividend payments as it sells Silicon Valley Bank's assets.
Signage for high-tech commercial bank Silicon Valley Bank, on Sand Hill Road in the Silicon Valley town of Menlo Park, California, August 25, 2016. (Photo via Smith Collection/Gado/Getty Images). ·(Smith Collection/Gado via Getty Images)
Bank concerns fester
Concerns about the banking industry spread Friday as shares of several other regional banks were also halted as their shares plunged.
The halts included Signature Bank (SBNY), a New York institution that serves some cryptocurrency clients, after its shares dropped more than 16%. First Republic Bank (FRC), which serves some companies in the venture world and also targets high-net worth clients from the tech industry, saw shares fall as much as 40% early Friday. Its shares were also halted, along with those of other regional banks Western Alliance Bancorp (WAL) and PacWest Bancorp (PACW). Trading in those four banks resumed during the day, and shares in all four closed down double digits. PacWest had the biggest drop, nearly 38%.
Another California bank that serves cryptocurrency clients, Silvergate Capital (SI), announced a “voluntary liquidation” Wednesday. Data analytics firm S3 Partners found Silvergate was the most shorted company in the stock market as Friday by percentage of float, with more than 84% of its shares available for borrow being sold short.
By comparison, bets against Silicon Valley Bank, crypto-friendly Signature Bank and other regional banks such as First Horizon National (FHB) and Bank OZK (OZK) stood at a more modest range of between 5.0% and 5.9% of their float being sold short.
The turmoil was a sign that investors are increasingly concerned about how banks, especially smaller ones, will fare now that the Federal Reserve is aggressively raising interest rates. Investors punished banks on Friday that had any perceived exposure to problematic customer bases or large amounts of bonds that could produce losses if banks were forced to sell them.
Many giant banks sidestepped the carnage on Friday, in a possible sign that investors view them as stronger and more able to withstand any problems that result from higher interest rates. Shares for JP Morgan Chase (JPM), the largest bank by assets in the US, rose 2.5%. Bank of America (BAC) and Citigroup (C) were roughly flat. Shares of Goldman Sachs Group (GS) were down more than 4%.
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SVB's rise and fall
Silicon Valley Bank was founded in 1983 by Bill Biggerstaff and Robert Medearis over a poker game. The bank started with a strategy of collecting deposits from venture capitalist financed businesses and survived the dot-com bubble despite a 50% drop in its stock price. By 2011, the Santa Clara bank had helped fund more than 30,000 startups.
The recent problems at SVB started with the Fed’s campaign to bring down inflation, which pinched many of its startup and tech clients. An outflow of deposits forced it to sell assets, bonds, at a loss.
Banks are big investors in bonds because they need lots of safe places to park their cash. Many of the biggest financial institutions in the country piled into these investments during a period of historically-low interest rates that spanned the early years of the pandemic, as banks took in tons of new deposits and lending was somewhat restrained.
But now the Fed is hiking rates at a rapid clip, with Fed Chair Jerome Powell warning earlier this week that the central bank may have to speed up the increases to cool the economy further. The problem that creates for banks is simple: Higher rates lower the value of their existing bonds.
Across all U.S. banks, unrealized losses on available-for-sale and held-to-maturity securities totaled $620 billion at the end of 2022, according to the Federal Deposit Insurance Corp. FDIC Chair Martin Gruenberg highlighted this risk during a speech on March 6 to an international banking conference.
Banks don’t have to realize these losses if they don’t sell the assets. But SVB Financial didn’t have that choice. Deposit outflows forced their hand. On Thursday, the stock fell 60% on concerns about the bank’s disclosure of a $1.8 billion loss from the sale of bonds and plans to raise $2.25 billion by selling common and preferred stock.
CNBC's David Faber reported early Friday that SVB's planned capital raise had not cleared the market, and that the firm was now seeking to sell itself. Then regulators seized SVB's bank. SVB also has a private banking and wealth division, a venture capital and credit investment arm, and investment banking operations.
“This is the most aggressive Fed rate hiking cycle since the 80’s. When you have rates rising so quickly inevitably some thing will break,” Seema Shah, chief global strategist at Principal Asset Management, told Yahoo Finance.
"There's always going to be some banks in the US which are weaker, but broadly, the U.S. banking industry is fairly well capitalized. So we're not looking at you know, a major financial system collapse by any means at all," Shah added.
Several analysts said Friday they don't anticipate SVB Financial’s challenges will cripple other regional banks. Morgan Stanley, in a note, said "the funding pressures facing SIVB are highly idiosyncratic and should not be viewed as a read-across to other regional banks."
"We do not believe there is a liquidity crunch facing the banking industry, and most banks in our coverage have ample access to liquidity," the bank said.
Bank of America analysts said in a Friday note that "we believe that the sharp sell-off in bank stocks" Thursday was likely overdone as investors extrapolated idiosyncratic issues at individual banks to the broader banking sector.”
Nevertheless, rising rates are a challenge for all banks, Bank of America analysts noted. They will affect net interest margins, a key measure of profitability for banks, and will harm the credit quality of their customers.