Federal regulators have taken over Silicon Valley Bank (SVB), which was a financial institution that primarily focused on investing in technology start-ups. This is one of the largest financial failures in the history of finance and the worst since the Global Financial Crisis a decade ago.
The bank’s collapse comes at a time when the tech industry has been losing a lot of its profitability in recent months. Tech firms are cutting jobs and the number of new start-ups is declining.
According to Wall Street Journal, the bank’s dramatic fall from grace, once beloved by the financial world, occurred after it tried to find a buyer for its assets following a reported loss.
Silicon Valley Bank was once a darling of banking. It announced a huge loss on its bond holdings and plans to balance out its finances. The bank collapsed quickly, causing widespread customer withdrawals and tanking its stock.
After scrapping a $2.25 billion share sales plan Friday morning, SVB Financial Group was on the verge of finding a buyer for the bank’s parent, SVB Financial Group. Regulators were not willing to wait. California Department of Financial Protection and Innovation shut down the bank Friday afternoon and placed it under the control of FDIC.
Santa Clara-based SVB surprised investors earlier this week by announcing that its assets had fallen to $2 billion due to a greater-than-expected drop in deposits. Since then, the stock has dropped more than 80% and tech clients have rushed to withdraw their deposits due to concerns about the bank’s health.
The markets fell despite Friday’s strong jobs report. However, Thursday’s sudden panic on Wall Street caused a carryover effect that dragged down the market. The value of the four largest U.S. banks fell by $52 billion on Thursday. The WSJ reported that bank stocks continued to plummet Friday morning with a number halted due to volatility.
According to CNBC, SVB failed to find a buyer after its financial losses. SVB Financial, its parent company, saw shares fall by 60% on Thursday, which resulted in the loss of market value in other institutions.
Many questions remain unanswered for account holders and investors following the FDIC’s takeover of SBV. SVB had $209 billion in total assets and $175.4 billion of total deposits at the end of 2022. The FDIC doesn’t know how many of these deposits exceeded their $250,000 insurance limit per depositor.
This financial failure, however, could have a limited impact on the wider financial sector, as opposed to previous ones. SVB was almost entirely focused on investments in tech. Banks with diverse holdings aren’t experiencing the same collapse as those with smaller holdings. Also, the FDIC acquisition means that there won’t be a bank run as initially reported in news reports. Wall Street analysts had previously stated that, and Morgan Stanley informed its clients that SVB’s problems are “highly unusual.”
SVB’s collapse was partly due to inflation concerns and the American economy. The Federal Reserve’s aggressive rate increases hit the tech sector especially hard. All told, SVB’s bond holdings were reduced by a significant amount. These and other problems led to deposits falling, which caused the bank’s sale of almost all its securities.