Regulators rushed Friday to seize the assets of one of Silicon Valley’s top banks, marking the biggest failure of a US financial institution since the height of the financial crisis nearly 15 years ago.
Silicon Valley Bank, the nation’s 16th largest bank, failed after depositors rushed to withdraw money this week amid worries 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 has served mostly technology workers 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, a startup incubator that launched Airbnb, DoorDash and Dropbox and has referred hundreds of entrepreneurs to the bank.
“I’ve heard from literally hundreds of our founders asking for help on how they can get through this. They’re asking, ‘Do I have to lay off my workers?'”
The chance of the turmoil spreading to the broader banking sector, as it did in the months leading up to the Great Recession, appears slim. The biggest banks — the ones most likely to cause an economic meltdown — have healthy balance sheets and plenty of capital.
Nearly half of the US technology and health care companies that went public last year after getting early funding from venture capital firms are Silicon Valley Bank customers, according to the bank’s website.
The bank also boasts of its connections with leading tech companies such as Shopify, ZipRecruiter and one of the leading venture capital firms, Andreesson Horowitz.
Tan estimated that about one-third of Y Combinator startups won’t be able to make payroll at some point in the next month if they can’t access their money.
Internet TV provider Roku was among the casualties of the bank collapse. It said in a regulatory filing on Friday that about 26% of its cash — $487 million — is deposited with Silicon Valley Bank.
Roku said its deposits with SVB are mostly uninsured and it doesn’t know “to what extent” it will recover them.
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 begin paying insured deposits on Monday. The FDIC and California regulators then plan to sell the remaining assets to make other depositors whole.
There was anxiety in the banking sector throughout the week, with shares falling by double digits. Then, news of Silicon Valley Bank’s distress pushed shares of nearly all financial institutions lower Friday.
Failure came with incredible speed. Some industry analysts suggested on Friday that the bank is a good company and a smart investment. Meanwhile, Silicon Valley Bank executives are trying to raise capital and find additional investors. However, trading in the bank’s shares was halted before the stock market opened due to extreme volatility.
Shortly before noon, the FDIC moved to close the bank. Interestingly, the agency did not wait until the business closed, which is the usual approach. The FDIC did not immediately find a buyer for the bank’s assets, indicating how quickly depositors cashed out.
Treasury secretary “watching closely”
The White House said Treasury Secretary Janet Yellen was “watching closely.” The administration has sought to reassure the public that the banking system is healthier than it was during the Great Recession.
“Our banking system is in a fundamentally different place than it was, you know, a decade ago,” said Cecilia Rouse, chairwoman of the White House Council of Economic Advisers. “The reforms that have been put in place before are really providing the kind of stability that we want to see.”
In 2007, the biggest financial crisis since the Great Depression hit the world after the value of mortgage-backed securities tied to unadvised housing loans collapsed. The panic on Wall Street led to the demise of Lehman Brothers, a firm founded in 1847. Because major banks had extensive exposure to each other, the crisis led to a rapid breakdown in the global financial system , putting millions out of work.
At the time of its failure, Silicon Valley Bank, based in Santa Clara, California, had $209 billion in total assets, the FDIC said. It’s unclear how many of its deposits exceed the $250,000 insurance limit, but previous regulatory reports have shown that many accounts exceed that amount.
The bank announced plans Thursday to raise up to $1.75 billion to bolster its capital position. That sent investors scrambling and shares fell 60%. They fell even lower on Friday before the opening of the Nasdaq, where the bank’s shares were traded.
As its name suggests, Silicon Valley Bank is a key financial conduit between the technology sector, startups and tech workers. It is considered good business sense to develop a bank relationship if a startup founder wants to find new investors or go public.
Conceived in 1983 by co-founders Bill Biggerstaff and Robert Medearis over a game of poker, the bank has used its Silicon Valley roots to become a financial foundation in the technology industry.
Bill Tyler, the CEO of TWG Supply in Grapevine, Texas, said he first realized something was wrong when his employees texted him at 6:30 Friday to complain that they hadn’t received their paychecks.
TWG, which has only 18 employees, already sent money for checks to a payroll services provider that used Silicon Valley Bank. Tyler is working hard to figure out how to pay his workers.
“We’re waiting at about $27,000,” he said. “It’s already not a timely payment. It is 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?'”
Silicon Valley Bank’s ties to the tech sector have added to its problems. Technology stocks have been hit hard in the past 18 months after growth spiked during the pandemic, and layoffs have spread across the industry. Venture capital funding is also declining.
At the same time, the bank has been 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 typically stable bonds begins to decline. That’s usually not a problem, but when depositors get anxious and start withdrawing their money, banks sometimes have to sell the bonds before they mature to cover the exodus.
That’s exactly what happened at Silicon Valley Bank, which had to sell $21 billion in highly liquid assets to cover sudden withdrawals. It took a $1.8 billion loss on that sale.
Ashley Tyrner, CEO of FarmboxRx, said she has talked to several friends whose businesses have been backed by venture capital. He described them as “beside themselves” over the bank’s failure. Tyrner’s chief operating officer tried to recover his company’s funds on Thursday but failed to do so in time.
“A friend said they couldn’t pay today and cried when they had to tell 200 employees because of this issue,” Tyrner said.