Biggest banking failure since 2008: Silicon Valley Bank collapses as depositors pull cash

New Delhi/New York: The Federal Deposit Insurance Corporation seized the assets of Silicon Valley Bank on Friday, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis.

The bank failed after depositors, mostly technology workers, and venture capital-backed companies began withdrawing their money, creating a run on the bank. FDIC said that depositors will have access to their insured deposits – capped at $250,000 – by Monday (March 13).

Silicon Valley was heavily exposed to tech industry and there is little chance of contagion in the banking sector as there was in the months leading up to the Great Recession more than a decade ago. Major banks have sufficient capital to avoid a similar situation.

The FDIC ordered the closure of Silicon Valley Bank and immediately took position of all deposits at the bank Friday. The bank had $209 billion in assets and $175.4 billion in deposits at the time of failure, the FDIC said in a statement. It was unclear how much of the deposits were above the $250,000 insurance limit at the moment.

However, data submitted to the FDIC by the bank at the end of 2022 showed that 89 per cent of its $175 billion in deposits were uninsured.

Notably, the FDIC did not announce a buyer of Silicon Valley’s assets, which is typically when there’s an orderly wind down of a bank. The FDIC also seized the bank’s assets in the middle of the business day, a sign of how dire the situation had become.

The financial health of Silicon Valley Bank was increasingly in question this week after the bank announced plans to raise up to $1.75 billion in order to strengthen its capital position amid concerns about higher interest rates and the economy.

Shares of SVB Financial Group, the parent company of Silicon Valley Bank, had plummeted nearly...70 per cent before trading was halted before the opening bell on the Nasdaq.

CNBC reported that attempts to raise capital failed and the bank was now looking to sell itself.

Silicon Valley bank was not a small bank, it’s the 16th largest bank in the country, holding $210 billion in assets. It acts as a major financial conduit for venture capital-backed companies, which have been hit hard in the past 18 months as the Federal Reserve has raised interest rates and made riskier tech assets less attractive to investors.

Venture capital-backed companies were being reportedly advised to pull at least two months’ worth of “burn” cash out of Silicon Valley Bank to cover their expenses. Typically, VC-backed companies are not profitable and how quickly they use the cash they need to run their businesses their so-called “burn rate” is a typically important metric for investors.

Diversified banks like Bank of America and JPMorgan pulled out of an early slump due to data released Friday by the Labor Department, but regional banks, particularly those with heavy exposure to the tech industry, were in decline.

Moreover, depositors with funds exceeding insurance caps will get receivership certificates for their uninsured balances, meaning businesses with big deposits stuck at the bank are unlikely to get their money out soon.

This is where the real problem lies.

While the full scale of the impact of SVB’s failure on Indian start-ups will only become clear on Monday, several start-up founders said that not being able to take out more than $250,000 from their accounts will severely impact their runway. Amid a funding winter, where availability of funds for start-ups is already dwindling, this could prove to be a major roadblock for them, especially young businesses.

On a poll run on the WhatsApp group of Indian founders whose start-ups were incubated by the US-based technology start-up accelerator YCombinator (YC), a large numbers of founders said that a majority of them had more than $250,000 with SVB – the amount that will be insured by the US regulators – with some of them having parked more than $1 million in their SVB accounts.

Not just start-ups, SVB was also a preferred personal banker for several ultra-high net-worth individuals in the technology space.

A founder explained that SVB had traditionally been the default banking partner for most start-ups because of its legacy in technology and experience of banking high growth and high burn companies. Basically, it dealt with businesses that traditional banks would typically stay away from given the perceived risk of failure.

For insured depositors, the funds will be accessible by Monday morning, but the process could be long and complicated for uninsured depositors, who will get a “receivership certificate”. The FDIC also said future dividend payments “may be made” to pay off uninsured funds as the bank’s assets are sold.

This could spark major concerns for thousands of uninsured depositors, who are typically not individuals but companies that need cash on hand for payroll and other expenses. So, even if the SVB crisis does not trigger a full-blown financial crisis, it has definitely put the livelihoods of many at risk.