Here’s how the second-biggest bank collapse in U.S. history happened in just 48 hours




A person from inside Silicon Valley Bank, middle rear, talks to people waiting outside of an entrance to Silicon Valley Bank in Santa Clara, Calif., Friday, March 10, 2023. The Federal Deposit Insurance Corporation seized the assets of the bank on Friday, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis. (AP Photo/Jeff Chiu)
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On Wednesday, Silicon Valley Bank was a well-capitalized institution seeking to raise some capital.

Within 48 hours, a panic induced by the very venture capital community that SVB had served and nurtured ended the bank’s 40-year run.

Regulators shuttered SVB Friday and seized its deposits in the largest U.S. banking failure since the 2008 financial crisis and the second-largest ever. The company’s downward spiral began late Wednesday when it surprised investors with news that it needed to raise $2.25 billion to shore up its balance sheet. What followed was the rapid collapse of a highly-respected bank that had grown alongside its technology clients.

Even now, as the dust begins to settle on the second bank wind-down announced this week, members of the VC community are lamenting the role that other investors played in SVB’s demise.

“This was a hysteria-induced bank run caused by VCs,” Ryan Falvey, a fintech investor of Restive Ventures, told CNBC. “This is going to go down as one of the ultimate cases of an industry cutting its nose off to spite its face.”

The episode is the latest fallout from the Federal Reserve’s actions to stem inflation with its most aggressive rate hiking campaign in four decades. The ramifications could be far-reaching, with concerns that startups may be unable to pay employees in coming days, venture investors may struggle to raise funds, and an already-battered sector could face a deeper malaise.

The roots of SVB’s collapse stem from dislocations spurred by higher rates. As startup clients withdrew deposits to keep their companies afloat in a chilly environment for IPOs and private fundraising, SVB found itself short on capital. It had been forced to sell all of its available-for-sale bonds at a $1.8 billion loss, the bank said late Wednesday.

The sudden need for fresh capital, coming on the heels of the collapse of crypto-focused Silvergate bank, sparked another wave of deposit withdrawals Thursday as VCs instructed their portfolio companies to move funds, according to people with knowledge of the matter. The concern: a bank run at SVB could pose an existential threat to startups who couldn’t tap their deposits.

SVB customers said they didn’t gain confidence after CEO Greg Becker urged them to “stay calm” in a call that began Thursday afternoon, and the stock’s collapse continued unabated, reaching 60% by the end of regular trading. Importantly, Becker couldn’t assure listeners that the capital raise would be the bank’s last, said a person on the call.

Death blow

All told, customers withdrew a staggering $42 billion of deposits by the end of Thursday, according to a California regulatory filing.

By the close of business that day, SVB had a negative cash balance of $958 million, according to the filing, and failed to scrounge enough collateral from other sources, the regulator stated.

Falvey, a former SVB employee who launched his own fund in 2018, pointed to the highly interconnected nature of the tech investing community as a key reason for the bank’s sudden demise.

Prominent funds including Union Square Ventures and Coatue Management blasted emails to their entire rosters of startups in recent days, instructing them to pull funds out of SVB on concerns of a bank run. Social media only heightened the panic, he noted.

“When you say, `Hey, get your deposits out, this thing is gonna fail,” that’s like yelling fire in a crowded theater,” Falvey said. “It’s a self-fulfilling prophecy.”

Another venture investor, TSVC partner Spencer Greene, also criticized investors who “were wrong on the facts” about SVB’s position.

“It appears to me that there was no liquidity issue until a couple of VCs called it,” Greene said. “They were irresponsible, and then it became self-fulfilling.”

‘Business as usual’

By Friday, as shares of SVB continued to sink, the bank ditched efforts to sell shares, CNBC’s David Faber reported. Instead, it was looking for a buyer, he reported. But the flight of deposits made the sale process harder, and that effort failed too, Faber said.

Friday evening, some SVB customers received emails assuring them that it was “business as usual” at the bank.

“I’m sure you’ve been hearing some buzz about SVB in the markets today so wanted to reach out to provide some context,” one SVB banker wrote to a client, according to a copy obtained by CNBC.

“It is business as usual at SVB,” the banker wrote. “Understandably there may be questions and I want to make myself available if you have any concerns.”

SANTA CLARA, CALIFORNIA - MARCH 10: A customer stands outside of a shuttered Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California. Silicon Valley Bank was shut down on Friday morning by California regulators and was put in control of the U.S. Federal Deposit Insurance Corporation. Prior to being shut down by regulators, shares of SVB were halted Friday morning after falling more than 60% in premarket trading following a 60% declined on Thursday when the bank sold off a portfol
A customer stands outside of a shuttered Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California. Justin Sullivan | Getty Images

Falvey, who started his career at Wells Fargo and consulted for a bank that was seized during the financial crisis, said that his analysis of SVB’s mid-quarter update gave him confidence. The bank was well capitalized and could make all depositors whole, he said. He even counseled his portfolio companies to keep their funds at SVB as rumors swirled.

Now, thanks to the bank run that ended in SVB’s seizure, those who remained with SVB face an uncertain timeline for retrieving their money. While insured deposits are expected to be available as early as Monday, the lion’s share of deposits held by SVB were uninsured, and its unclear when they will free up.

“The precipitous deposit withdrawal has caused the Bank to be incapable of paying its obligations as they come due,” the California financial regulator stated. “the bank is now insolvent.”

U.S. regulators rushed to seize the assets of Silicon Valley Bank on Friday after a run on the bank, marking the largest failure of a financial institution since Washington Mutual collapsed at the height of the financial crisis more than a decade ago.

Silicon Valley Bank, the nation’s 16th largest bank failed after its depositors — mostly technology workers and venture capital-backed companies — hurried to withdraw money this week as anxiety over the bank’s health spread. It is the second biggest bank failure in U.S. history.

People look at signs posted outside of an entrance to Silicon Valley Bank in Santa Clara, Calif., Friday, March 10, 2023. The Federal Deposit Insurance Corporation is seizing the assets of Silicon Valley Bank, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis. The FDIC ordered the closure of Silicon Valley Bank and immediately took position of all deposits at the bank Friday. (AP Photo/Jeff Chiu)
People look at signs posted outside of an entrance to Silicon Valley Bank in Santa Clara, Calif., Friday, March 10, 2023. The Federal Deposit Insurance Corporation is seizing the assets of Silicon Valley Bank, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis. The FDIC ordered the closure of Silicon Valley Bank and immediately took position of all deposits at the bank Friday. (AP Photo/Jeff Chiu)

The bank had deep ties to Silicon Valley industries and startups. Y Combinator, an incubator startup that has launched companies such as Airbnb, DoorDash and Dropbox, has referred hundreds of entrepreneurs to the bank.

“This is an extinction-level event for startups,” Y Combinator CEO Garry Tan said. “I literally have been hearing from hundreds of our founders asking for help on how they can get through this. They are asking, ‘Do I have to furlough my workers?’”

Tan estimated nearly one-third of Y Combinator’s startups won’t be able to make payroll at some point in the next month if they can’t access their money. He said he is asking regulators and lawmakers if the startups can be eligible for financial aid.

Silicon Valley was heavily exposed to tech industry but there is little chance of chaos spreading in the broader banking sector like in the months leading up to the Great Recession more than a decade ago. The biggest banks — those most likely to cause a widespread economic meltdown — have healthy balance sheets and plenty of capital.

In 2007, the biggest financial crisis since the Great Depression rippled across the globe after mortgage-backed securities tied to ill-advised housing loans collapsed in value. The panic on Wall Street led to the demise of Lehman Brothers, a firm founded in 1847. Because major banks had extensive exposure to one another, it led to cascading breakdown in the global financial system, putting millions out of work.

There has been unease in the banking sector all week and the news of Silicon Valley Bank’s distress pushed shares of almost all financial institutions lower Friday, shares that had already tumbled by double digits since Monday.

People walk past a Silicon Valley Bank sign at the company's headquarters in Santa Clara, Calif., Friday, March 10, 2023. The Federal Deposit Insurance Corporation is seizing the assets of Silicon Valley Bank, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis. The FDIC ordered the closure of Silicon Valley Bank and immediately took position of all deposits at the bank Friday. (AP Photo/Jeff Chiu)
People walk past a Silicon Valley Bank sign at the company’s headquarters in Santa Clara, Calif., Friday, March 10, 2023. The Federal Deposit Insurance Corporation is seizing the assets of Silicon Valley Bank, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis. The FDIC ordered the closure of Silicon Valley Bank and immediately took position of all deposits at the bank Friday. (AP Photo/Jeff Chiu)

Silicon Valley Bank’s failure arrived with incredible speed, with some industry analysts on Friday suggesting it was a good company and still likely a wise investment. Silicon Valley Bank executives were trying to raise capital early Friday and find additional investors. However, trading in the bank’s shares was halted before stock market’s the opening bell due to extreme volatility.

Shortly before noon eastern, the Federal Deposit Insurance Corporation moved to shutter the bank. Notably, the FDIC did not wait until the close of business to seize the bank, as is typical in an orderly wind down of a financial institution. The FDIC could not immediately find a buyer for the bank’s assets, signaling how fast depositors had cashed out.

The White House said that Treasury Secretary Janet Yellen is “watching closely.” The White House sought to reassure people that the banking system is much healthier than it was in the Great Recession.

“Our banking system is in a fundamentally different place than it was, you know, a decade ago,” said Cecilia Rouse, chair of the White House Council of Economic Advisers. “The reforms that were put in place back then really provide the kind of resilience that we’d like to see.”

Silicon Valley Bank had $209 billion in total assets at the time of failure, the FDIC said. It was unclear how much of its deposits were above the $250,000 insurance limit, but previous regulatory reports showed that much of Silicon Valley Bank’s deposits exceeded that limit. The FDIC that deposits below the $250,000 limit would be available Monday morning.

The bank still appeared stable this year, but on Thursday it announced plans to raise up to $1.75 billion in order to strengthen its capital position. That sent investors scurrying and shares plunged 60%. They rocketed lower again Friday before the open of the Nasdaq, where it is traded.

As its name implied, Silicon Valley Bank was a major financial conduit between the technology sector, its founders and startups as well as its workers. It was seen as good business sense to develop a relationship with the bank if a founder wanted to find new investors or go public.

Conceived in 1983 by co-founders Bill Biggerstaff and Robert Medearis during a poker game, the bank has leveraged its Silicon Valley roots to become a financial cornerstone in the tech industry.

Nearly half of the U.S. technology and health care companies that went public last year after getting their early funding from venture capital firms were Silicon Valley customers, according to the bank’s website. The bank also boasts of its customers’ connections to several well-known tech companies such as Shopify, ZipRecruiter and one of the leading VC firms, Andreesson Horowitz, founded by web browser pioneer Marc Andreessen.

Bill Tyler, the CEO of TWG Supply in Grapevine, Texas, said he first realized something was wrong when his employees were texting him at 6:30 a.m. Friday that they didn’t receive their paychecks. TWG, which has just 18 employees, had already sent the money for its paychecks to a payroll services provider, Rippling PEO, which had used Silicon Valley Bank. He was scrambling to figure out how to pay his workers.

“We’re waiting on roughly $27,000,” he said. “It’s already not a timely payment. It’s already an uncomfortable position. I don’t want to ask any employees, to say, ‘Hey, can you wait until mid-next week to get paid?’”

People stand outside of an entrance to Silicon Valley Bank in Santa Clara, Calif., Friday, March 10, 2023. The Federal Deposit Insurance Corporation seized the assets of the bank on Friday, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis. (AP Photo/Jeff Chiu)

Rippling’s CEO, Parker Conrad, tweeted that the company will process payrolls through JPMorgan Chase. But today’s payments out of Silicon Valley Bank, he added, “have not been processed” and the FDIC’s involvement made him skeptical of assurances he was getting from the bank.

Silicon Valley Bank’s ties to the tech sector have added to its troubles. Technology stocks have been hit hard in the past 18 months after a growth surge during the pandemic and layoffs have spread throughout the industry. Venture capital funding has also been declining.

At the same time, the bank was hit hard by the Federal Reserve’s fight against inflation and an aggressive series of interest rate hikes to cool the economy.

As the Fed raises its benchmark interest rate, the value of bonds, typically a stable asset, start to fall. That is not typically a problem but when depositors grow anxious and begin withdrawing their money, banks sometimes have to sell those bonds before they mature to cover that exodus.

That is exactly what happened to Silicon Valley Bank, which had to sell $21 billion in highly liquid assets to cover the exodus of deposits. It took a $1.8 billion loss on that sale.

Ashley Tyrner, CEO of FarmboxRx, said she’s spoken to several friends whose businesses are backed by venture capital. She described those friends as being “beside themselves” over the bank’s failure. Tyrner’s chief operating officer tried to withdraw her company’s funds on Thursday, but failed to do so in time.

“One friend said they couldn’t make payroll today and cried when they had to inform 200 employees because of this issue,” Tyrner said.

Source: Agencies