One of the world’s most important lenders to technology start-ups, struggling under the weight of poor results and panicked customers, collapsed on Friday, forcing the federal government to step in.
The Federal Deposit Insurance Corp. said Friday it will acquire Silicon Valley Bank, a 40-year-old institution based in Santa Clara, Calif. The bank failure was the second largest in US history and the largest since the financial crisis of 2008.
The move placed nearly $175 billion of customer deposits under the regulator’s control. While the rapid collapse of the country’s 16th largest bank evoked memories of the global financial panic a decade and a half ago, it did not immediately touch fears of widespread destruction in the financial sector or the global economy.
The Silicon Valley bank’s failure two days after its hasty moves to deal with withdrawal requests and a rapid decline in the value of its investment stocks shocked Wall Street and depositors, sending its stock on watch. The bank, which had $209 billion in assets at the end of 2022, was working with financial advisers to find a buyer as of Friday morning, a person familiar with the negotiations said.
While the woes facing Silicon Valley banks were unique, the financial contagion spread to parts of the banking sector, prompting Treasury Secretary Janet Yellen to publicly reassure investors that the banking system was resilient.
Investors dumped shares of Silicon Valley banks including First Republic, Signature Bank and Western Alliance, many of which serve start-up clients and have similar investment portfolios.
Trading in the shares of at least five banks was halted repeatedly throughout the day as their steep declines triggered stock market volatility caps.
By comparison, some of the country’s biggest banks seemed more insulated from the downturn. Shares of JP Morgan, Wells Fargo and Citigroup were all broadly flat on Friday after Thursday’s decline.
That’s because the biggest banks operate in a hugely different world. Their capital requirements are stricter and they have much broader deposit bases than banks like Silicon Valley, which don’t attract as many retail customers. Regulators have tried to prevent big banks from focusing too much on one area of the business, and they often stay away from riskier assets like cryptocurrencies.
“I don’t think it’s a problem for the big banks — it’s good news, they’re diversified,” said Sheila Beyer, a former head of the FDIC. Because the big banks need to hold the money. Equivalent to safer forms of government debt, they should be expected to have abundant liquidity.
On Friday, Ms. Yellen discussed issues surrounding the Silicon Valley bank with banking regulators, according to a Treasury Department statement.
Representatives from the Federal Reserve and the FDIC also hosted a bipartisan conference for members of Congress organized by Maxine Waters, Democrat of California and ranking member of the House Financial Services Committee.
The Silicon Valley bank’s downward spiral accelerated at an incredible pace this week, but its problems have been brewing for more than a year. Founded in 1983, the bank has long been a lender to start-ups and their executives.
Although the bank advertises itself as a “partner for the innovation economy,” some decidedly old decisions have led to this moment.
By siphoning money from high-profile start-ups that had raised lots of money from venture capitalists, Silicon Valley Bank did what all banks do: keep a portion of deposits and invest the rest in the hope of a return. . In particular, the bank invested most of its customer deposits in long-term Treasury bonds and mortgage bonds, which promised moderate, steady returns when interest rates were low.
It worked well for many years. The bank’s deposits more than doubled from $49 billion in 2018 to $102 billion by the end of 2020. A year later, in 2021, its coffers stood at $189.2 billion, as start-ups and tech companies enjoyed higher profits during the pandemic.
But it bought large amounts of bonds just before the Federal Reserve began raising interest rates slightly a year ago, failing to make provisions for the possibility that interest rates would rise too quickly. As rates rose and new government bonds paid higher interest, those stocks became attractive.
It doesn’t matter unless the bank’s customers want their money back. But as interest rates rose and start-up funding slowed, the bank’s customers started withdrawing more of their money.
To pay those redemption demands, Silicon Valley Bank sold some of its investments. In its surprise revelation on Wednesday, the bank admitted it lost nearly $2 billion when it was forced to sell some of its shares.
“It’s the classic Jimmy Stewart problem,” Ms. Baer said, referring to the actor who played a banker trying to stop a bank run in “It’s a Wonderful Life.” “If everyone starts withdrawing money at the same time, the bank will have to start selling some of its assets to return the money to depositors.”
Those fears fueled investor concern about some regional banks. Like Silicon Valley Bank, Signature Bank is a bank that lends to the start-up community. Former President Donald J. It is best known for its association with Trump and his family.
First Republic Bank, a San Francisco-based lender focused on wealth management and private banking services for high-net-worth clients in the technology sector, recently warned that rising interest rates are hampering its ability to turn a profit. Western Alliance Bank, its Phoenix-based peer in the wealth management industry, faces similar pressures.
Separately, another bank, Silvergate, said on Wednesday to cease operations and liquidate after suffering huge losses due to its exposure to the cryptocurrency industry.
A First Republic spokesperson responded to a request for comment by sharing a response the bank filed with the Securities and Exchange Commission on Friday, saying its deposit base is “strong and very well diversified” and its “liquidity position is very strong.”
A Western Alliance spokeswoman pointed to the bank’s press release on Friday detailing the state of its balance sheet. “Deposits remain strong,” the report said. “The quality of the property is excellent.”
Representatives for Signature and Silicon Valley Bank declined to comment. Representatives for the Federal Reserve and the FDIC declined to comment.
Some banking experts on Friday pointed out that a big bank like Silicon Valley might have better managed its interest rate risks if parts of the Dodd-Frank financial-regulatory package had not been withdrawn under the president after the 2008 crisis. Trump.
In 2018, Mr. Trump signs bill to reduce regulatory scrutiny for several regional banks Silicon Valley Bank’s chief executive, Greg Becker, was a strong supporter of the change, which removed the requirement that banks with less than $250 billion in assets submit to the Fed’s stress test and changed the cash requirements they must hold. Balance sheets to protect against shocks.
At the end of 2016, Silicon Valley Bank had $45 billion in assets. It has risen to more than $115 billion by the end of 2020.
Friday’s upheaval drew an uncomfortable parallel to the 2008 financial crisis. While it’s not uncommon for small banks to fail, the last time a bank of this magnitude was unwound was in 2008 when the FDIC took over Washington Mutual.
The FDIC rarely acquires banks while markets are open, preferring to place a failed institution into receivership on Friday after business closes for the weekend. But the banking regulator issued a news release in the first few hours of trading on Friday, saying it had created a new bank, Santa Clara, to hold the failed bank’s deposits and other assets.
The regulator said the new entity would be operational by Monday and checks issued by the old bank would continue to be cleared. While customers with deposits of up to $250,000 — the maximum covered by FDIC insurance — are made in full, there is no guarantee that depositors with larger amounts in their accounts will get their money back.
Those customers will be issued certificates for their uninsured funds, meaning they are first in line to be repaid with recovered funds while the FDIC keeps Silicon Valley Bank in receivership.
When California bank IndyMac failed in July 2008, like Silicon Valley Bank, there was no immediate buyer. The FDIC kept IndyMac in receivership until March 2009, and large depositors eventually got back only 50 percent of their uninsured funds. When Washington Mutual was bought by JP Morgan Chase, the account holders were made whole.
Maureen Farrell And Joe Rennison Contributed report.