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Regulators rushed to seize assets from one of Silicon Valley’s top banks, marking the biggest failure of a US financial institution since the financial crisis nearly 15 years ago.
Silicon Valley Bank, the 16th largest bank in the US, failed after depositors rushed to withdraw their money this week amid concerns about the bank’s health. It was the second largest bank failure in US history after the collapse of Washington Mutual in 2008.
The bank is mostly staffed by tech and venture capital-backed companies, including some of the industry’s best-known brands.
“This is an extinction-level event for startups,” said Garry Tan, CEO of Y Combinator, the startup incubator that launched Airbnb, DoorDash and Dropbox and has referred hundreds of entrepreneurs to the bank.
“I’ve literally heard from hundreds of our founders asking for help on how to deal with this. They’re asking, ‘Should I lay off my employees?'”
Small chance of widespread chaos
There appears to be little chance of widespread chaos in the broader banking sector, as occurred in the months leading up to the Great Recession. The biggest banks – the ones most likely to cause the economic crisis – have healthy balance sheets and plenty of capital.
Nearly half of the US technology and health care companies that went public last year after securing seed funding from venture capital firms were Silicon Valley Bank (SVB) customers, according to the bank’s website.
The bank also boasts relationships with leading technology companies such as Shopify, ZipRecruiter and one of the top venture capital firms, Andreesson Horowitz.
Tan estimates that nearly one-third of Y Combinator startups won’t be able to pay their salaries at some point in the next month if they can’t access the money.
Internet TV provider Roku was among the victims of the bank collapse. It said in a regulatory filing on Friday that about 26 percent of its cash – $487 million US – was kept at Silicon Valley Bank.
Roku said deposits with SVB are generally uninsured and it doesn’t know “how much” it can recover.
As part of the foreclosure, California bank regulators and the FDIC transferred the bank’s assets to a newly created institution – the Deposit Insurance Bank of Santa Clara. The new bank will start paying insured deposits on Monday. Then the FDIC and California regulators plan to sell the remaining assets to make more deposits.
Failed to load quickly
There was unease in the banking sector all week, with shares tumbling by double digits. Then the news of the distress of Silicon Valley Bank pushed Shares of almost all financial institutions even lower there
Failure came with incredible speed. Some industry analysts suggested on Friday that the bank is still a good company and a wise investment. Meanwhile, Silicon Valley Bank executives are trying to raise capital and find additional investors. However, trading in the bank’s stock was halted before the stock market’s opening bell due to extreme volatility.
Shortly before noon, the FDIC moved to shutter the bank. In particular, the agency does not wait until the business closes, which is a typical approach. The FDIC could not immediately find a buyer for the bank’s assets, signaling how quickly depositors are withdrawing their money.
The White House said US Treasury Secretary Janet Yellen was “monitoring closely.” The government is trying to reassure the public that the banking system is healthier than it was during the Great Recession.
“Our banking system is in a very different place than it was, you know, ten years ago,” said Cecilia Rouse, chairwoman of the White House Council of Economic Advisers.
“The reforms we implemented at the time really gave us the resilience we wanted.”
In 2007, the biggest financial crisis since the Great Depression swept across the globe after mortgage-backed securities tied to ill-advised home loans collapsed. The panic on Wall Street led to the demise of Lehman Brothers, a company founded in 1847.
Because the major banks had extensive exposure, the crisis caused damage to the global financial system, putting millions of people out of work.
At the time of the failure, Silicon Valley Bank, which is based in Santa Clara, California, had total assets of $209 billion, the FDIC said.
It’s unclear how many of those deposits exceed the $250,000 insurance limit, but previous regulatory reports indicate that many accounts exceed that amount.
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