A Silicon Valley Bank employee this Friday speaks to customers at the institution, which was announced to be closing this morning. Jeff Chiu (AP)
US banking regulators this Friday morning intervened at Silicon Valley Bank ahead of the rapid deposit flight it has suffered. The intervention of the California-based company, whose main clients are entrepreneurs and technology companies from its state and from Massachusetts, puts an end to two days of uncertainty in which its shares plummeted in the stock market after the announcement of its plans to raise capital and the sale of a key portfolio of Borrowing at a loss to avoid losing liquidity.
The sudden bankruptcy of the institution, the 16th largest in the US, reminded analysts of the worst financial crisis that was the origin of the Great Recession. Though little known internationally for its more corporate-focused work, this is the second largest case by a US bank, behind only Washington Mutual, which collapsed in 2008. In the midst of the crisis, regulators tried to create certainty. “All insured depositors will have full access to their insured deposits no later than Monday, March 13, 2023,” said the Federal Deposit Insurance Corporation (FDIC), the public entity that controls the financial institution, founded in 1982.
Hundreds of people went to the bank’s offices throughout the morning of this Friday to withdraw their money. Dor Levi, one of Lyft’s top executives, was among them, according to journalist Eric Newcomer. The businessman went to the bank’s Manhattan offices but was prevented from entering. The company asked the New York City Police Department for help. Fears among users had grown in recent days over reports that the bank had contacted Goldman Sachs to help with a $2 billion sale of shares. An attempt was made to carry out the operation secretly, but when users met, they came to get their money. That prompted the bank’s leadership to quickly start looking for a buyer on Friday, but banking regulators stepped in to stop time.
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The uninsured, i.e. anyone with more than $250,000 in their account (234,000 euros at current exchange rates), have a harder time: next week they will receive an advance and a certificate of the remainder of their balance. If the bank’s assets are sold, they will ask for more, although there is currently no guarantee that they will get it all back. The number of people affected is still unknown, but as of December 31, 2022, the bank had approximately $209,000 million in assets and $175,400 million in deposits.
The FDIC has announced that another banking entity, the National Bank of Santa Clara, has been formed to take over Silicon Valley Bank’s customers and accounts. “At the time of closing, the number of depositors who exceeded insurance coverage limits was undetermined,” the statement said. The number will be available in the coming days once Santa Clara Bank receives the additional information from the accounts and contacts customers. The FDIC has asked all depositors with balances greater than $250,000 to contact them directly by phone. The new institution is unlikely to be able to repay Silicon Valley Bank’s biggest clients any time soon.
To reassure the bank’s customers, the regulator has said the headquarters of Silicon Valley Bank and all of its franchises will reopen their doors on Monday. Online banking services and apps will also be available.
The case not only brings the financial crisis back to the fore. It was also the first bank failure in 2023. To find the next precedent one has to go back to October 2020 when the Almena State Bank of Kansas closed, although its impact was less due to its smaller size compared to the Silicon Valley Bank that has caused the Big Four banks to sell 52,000 in the last few days and plunges in stock markets worldwide.
The bank’s bankruptcy is a blow to California’s technological heart, which in turn is one of the main engines of the local economy. Silicon Valley Bank was at the epicenter, in a startup hotspot. It has managed to position itself as a boutique and highly specialized institution in an environment full of adversities, such as those encountered by entrepreneurs in their early years, when it is difficult to obtain credit due to a lack of income. His clients included the venture capital funds Andreessen Horowitz and Insight Partners; Beyond Meat, an artificial meat company that went public three years ago; the communications giant Discovery.
In its most recent public prospecting profile, released last January, Silicon Valley Bank claimed to offer its services to about 50% of US venture-backed companies. The main customers included start-ups with a focus on health. These made up 44% of the portfolio last year. The number represented a decrease from previous years. In 2015, executives boasted 65% of startup companies were in business.
The strategy then was to become the first bank, the one where new entrepreneurs matured their projects until they were ready to make the leap to larger institutions. Over the past decade, the institution has experienced sustained growth, expanding its lending capacity by 25% every year since 2012. This has caused them to push beyond their natural boundaries of San Francisco and Boston, the premier environments for business. Bank money also supported corporate projects in Canada, China, Denmark, Germany, Ireland, Israel, Sweden and the United Kingdom.
Although this is the most severe phase, this was not the only phase of turmoil for the bank. In 2001, stocks lost 50% of their value when the tech bubble burst. In more than two decades, however, they’ve managed to come back and were the first bank for more than 660 unicorns, startups that are valued at more than $1 billion. Now his name joins other fallen banks as analysts, investors and regulators monitor possible contagion.
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