US banking regulator, the California Department of Financial Protection and Innovation, on Friday shuttered the SVB Financial Group, which operates the Silicon Valley Bank, and seized its assets after the bank closed Friday with a negative cash balance.
The failure of the sixteenth-largest bank in the United States followed a run on the bank with depositors pulling out $42 billion from Silicon Valley Bank on, according to a regulatory filing on Friday.
The run was reportedly sparked by a letter that Silicon Valley Bank chief executive officer Greg Becker sent to shareholders on Wednesday. The bank had suffered a $1.8 billion loss on the sale of US treasuries and mortgage-backed securities and outlined a plan to raise $2.25 billion of capital to shore up its finances.
Customers immediately tried to pull their money, including many of the venture-capital firms. Moreover, fund managers like Peter Thiel’s Founders Fund, Coatue Management, Union Square Ventures and Founder Collective advised their startups to pull their cash from the bank, according to reports.
At the close of business on 9 March, the bank had a negative cash balance of $958 million, according to an order taking possession of the bank filed by California banking regulator, the Department of Financial Protection and Innovation.
When the Federal Reserve sent its cash letter — a list of checks and other transactions for the bank to process - to SVB, it failed to pull together enough currency to meet it, according to the California regulator.
“Despite attempts from the bank, with the assistance of regulators, to transfer collateral from various sources, the bank did not meet its cash letter with the Federal Reserve,” the order from Commissioner Clothilde Hewlett said.
The order places the lender into receivership by the state regulator.
As of 31 December 2022, the Silicon Valley Bank had about $209 billion in total assets and about $175.4 billion in total deposits, as per the Federal Deposit Insurance Corporation (FDIC).
The FDIC said customers will have continued access to their insured funds beginning Monday. However, payments to uninsured depositors will hinge on the sale of bank assets.
According to SVB's own estimates in 2022, 96 per cent of its $173.1 billion in deposits exceeded or were not covered by FDIC insurance.
SVB, which primarily caters to Silicon Valley startups, saw its deposits more than triple from $60 billion in 2019 to over $190 billion by 2022.
This funds came as more venture funds flowed to startups. The start-ups parked their excess money with the bank. The bank in turn parked a major portion of the deposit money into fixed-return mortgage-backed securities as it could not use these funds in unbridled lending.
Since the bank's deposits almost cost nothing, the model was profitable. When government securities yielded 0.5 per cent, the Silicon Valley Bank managed to make 1.5 per cent.
SVB seems to have erred in selecting non-floating interest rate assets at a time when interest rates were poised to rise. The bank was locked into low yields when interest rates on government securities were much higher.
The bank also has unique vulnerabilities in a rising interest regime. The bank had to abandon a capital-raising programme through equity and debt, which wiped off nearly $80 billion worth of shareholder value.
The crisis that enveloped the bank also triggered a global sell-off in banking stocks after it launched a rescue share sale to plug a near-$2 billion gaping hole in its finances.
The collapse of SVB is likely to spell trouble for Silicon Valley, as the bank is one of the biggest lenders to startups and V C funds in the US.