On Friday morning, Silicon Valley Bank crumbled following a wild 48 hours marked by a bank run and capital crisis, resulting in the second-largest financial institution failure in the history of the United States.
In response, regulators in California shut down the technology lender and placed it under the jurisdiction of the US Federal Deposit Insurance Corporation, which will act as a receiver. Typically, this entails liquidating the bank’s assets to repay its customers, including depositors and creditors.
The US Federal Deposit Insurance Corporation (FDIC), an autonomous government entity responsible for safeguarding bank deposits and supervising financial institutions, assured that all insured depositors would have complete access to their protected funds by Monday morning. Meanwhile, uninsured depositors would receive an “advance dividend” within the next seven days.
Despite repeated attempts to obtain a comment from Silicon Valley Bank, which was previously owned by SVB Financial Group, the bank did not respond.
The bank’s troubles began on Wednesday when it divulged a significant loss from the sale of securities and intended to issue $2.25 billion in new shares to reinforce its balance sheet. These developments caused panic among major venture capital firms, which instructed their clients to withdraw their funds from the bank.
On Thursday, the company’s stocks plummeted, causing a ripple effect on other banks. SVB’s shares were eventually halted by Friday morning, as its attempts to swiftly acquire capital or seek a potential buyer proved futile. Additionally, several other bank stocks, namely First Republic, PacWest Bancorp, and Signature Bank, were temporarily suspended on Friday.
It is worth noting that the timing of the FDIC’s takeover in mid-morning was unusual since the agency often intervenes only after the market closes.
Better Markets CEO Dennis M. Kelleher said:
SVB’s condition deteriorated so quickly that it couldn’t last just five more hours. That’s because its depositors were withdrawing their money so fast that the bank was insolvent, and an intraday closure was unavoidable due to a classic bank run.
The deterioration of Silicon Valley Bank can be attributed, in part, to the Federal Reserve’s aggressive implementation of interest rate hikes within the past year.
During the period when interest rates were nearly zero, banks heavily invested in long-term, seemingly low-risk Treasuries. However, as the Fed elevated interest rates to combat inflation, the worth of those assets plummeted, resulting in banks accumulating unrealized losses.
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