Silicon Valley Bank closed in second-biggest bank failure in U.S. history
March 10, 2023 Updated Fri., March 10, 2023 at 8:19 p.m.
The second-largest bank failure in U.S. history rocked the tech industry and sent ripples of anxiety throughout the financial system Friday as Silicon Valley Bank went from being a key part of the tech ecosystem to collapsing in a matter of hours.
The bank, which largely serves startups and venture capitalists, was shut down by regulators and taken over by the federal government after depositors scrambled to withdraw their money following a surprise filing from the firm on Wednesday night that it had sold $21 billion in assets and was selling more of its own stock to shore up its balance sheet.
The stock prices of other banks fell too, and Treasury Secretary Janet L. Yellen said she was monitoring the situation. Startup founders and venture capitalists fretted that money needed to pay employees could be lost or frozen by the bank’s collapse.
Silicon Valley Bank’s rapid failure shocked the tech industry, prompting fears that the economic situation for the sector is worse than previously thought. The collapse is also strengthening calls from Wall Street analysts and investors that the Federal Reserve’s interest rate hikes are too aggressive and risk causing serious damage to the economy.
At the end of December, Silicon Valley Bank held about $209 billion in total assets, making it the second-largest failure of a federally insured bank after Washington Mutual, which collapsed during the financial crisis in 2008. A spokesperson for the bank did not return a request for comment.
The Federal Deposit Insurance Corporation, which took over the bank, said depositors would be able to withdraw the $250,000 of government-insured funds on Monday. But because the bank served tech businesses, many of them had much higher amounts of money stored with the bank. On Friday, questions ricocheted around Silicon Valley about whether companies would be able to get their money back, and what to do if they couldn’t.
The bank’s failure also leaves a gaping hole for the tech industry, which had relied on the bank for its expertise in startups and willingness to provide services to fast-growing, risky ventures.
“No bank understand startups and tech the way they do,” said Antoine Nivard, co-founder and general partner at Blank Ventures. “They have a 40-year reputation earned the hard way built on the most extensive network of insider relationships with Silicon Valley’s most important players.”
The FDIC said it created a new bank to manage the firm’s operations, starting on Monday – a rare occurrence in a bank failure that typically means that the process was rushed.
Officials at the FDIC worked into the early morning hours on Friday as it became increasingly clear that regulators may have to shut down the bank, according to two people briefed on the matter, who spoke on the condition of anonymity to describe private deliberations.
The looming disaster sneaked up on them quickly. In previous crises, officials have had weeks or months to try to find a larger bank to take over a smaller one in distress. The highly accelerated timetable in this instance made that extremely difficult if not impossible.
As the voting members of the FDIC received regular virtual briefings throughout the day on Thursday, regulators zeroed in on just how big the bank was, the people said. Silicon Valley Bank dwarfed the size of Silvergate, a bank of about a tenth of the size that was recently forced to liquidate.
For now, many banking regulators are confident that the contagion will not spread to the financial sector more broadly. There are not that many banks structured like the Silicon Valley Bank, and rules after the 2008 financial crisis help guarantee the stability of the very biggest Wall Street firms.
But some experts say regulators should move quickly to minimize the risk. Lawrence H. Summers, the former Democratic treasury secretary, said he is hopeful that by Monday the former Silicon Valley Bank will be incorporated and doing business regularly as part of another financial firm. A sale to another bank, however, could come at a loss, in which case the FDIC may have to provide federal support to facilitate the sale. That could trigger a populist outcry.
Summers said that he hopes “if it’s necessary to provide some kind of support to get that kind of transaction done, the FDIC will do it.” He added: “I don’t think this is a time for moral hazard speeches.”
Natasha Sarin, a former top official in the Biden administration’s Treasury Department, said there probably is a “very active” conversation among federal regulators about what to do with the bank.
“Whether there is contagion and effects that follow onto other financial institutions is something regulators are incredibly focused on right now, because this is a traditional bank run. That’s what is happening,” Sarin said. “You have to work for any systemic effects that are going to arise.”
Founded in 1983, Silicon Valley Bank grew alongside the tech industry, weathering the ups and downs inherent to the sector. As the venture capital market boomed in the late 2000s and early 2010s, the bank took advantage of the influx of new startups, becoming a go-to banker for companies that needed a bank that could handle the risky and fast-moving world of early-stage tech.
The bank expanded rapidly, opening new U.S. offices and adding international ones too. It now has a presence in nine countries, including China and India. It served a spectrum of small and large tech companies, including e-commerce powerhouse Shopify and cybersecurity company CrowdStrike. Its clients list also included powerful tech founders and executives, as well as storied venture capital firms like Andreessen Horowitz and Insight Partners.
On Friday, the bank’s glass-front and wood paneled two-story building on Silicon Valley’s famous Sand Hill Road – known for housing venture capital funds that invest in startups – appeared empty. A copy of a news release was taped to the front glass doors announcing regulators had closed the bank.
After the bank said it had sold assets and was raising new money on Wednesday, some tech investors and founders on Twitter encouraged others on Thursday to withdraw their money as fast as possible. Others said not to act too hastily for fear of causing a collapse.
“There’s clearly panic going on,” said Cornelius Hurley, an adjunct banking law professor at Boston University School of Law. “But sometimes panic can be rational.”
Yellen said at a hearing Friday that, “When banks experience financial losses, it is and should be a matter of concern.”
Yellen convened leaders on Friday from the nation’s top banking regulators – the FDIC, Federal Reserve, and Office of the Comptroller of the Currency – to discuss the Silicon Valley Bank failure, the Treasury Department said in a statement.
“Yellen expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient and regulators have effective tools to address this type of event,” the statement added
Briefing reporters at the White House on Friday, Cecilia Rouse, chair of the White House Council of Economic Advisers, said that the financial system was much safer due to the bank stress tests and other safeguards approved by Democrats to rein in Wall Street following the 2008 crisis.
“Our regulators have much more visibility into the banking sector than they did a decade ago,” Rouse said. “We know we had to build more resilience into our banking system, which allows it to withstand these kinds of shocks. I do have faith that we have the tools for this sector and for our regulators.”
Over the past year, share prices for tech companies have cratered as high interest rates and concerns about the economy cut into the amount of money available for investment in big tech projects and startup funding. Both big and small companies have laid off tens of thousands of workers – though most companies are still making money and growing, and concerns are far lower than they were during the dot-com crash or the financial crisis of 2008. Large company CEOs have blamed the layoffs on over-hiring during the pandemic, and venture capitalists have said the pullback in new startup funding was a needed correction from years of over-exuberance.
Still, the panic over Silicon Valley Bank revealed deeper fears that the economic situation in Silicon Valley could get worse. Arjun Sethi, co-founder of venture investor Tribe Capital, said in a memo posted to LinkedIn that the industry was one-third of the way through “the desert” and that founders should be prepared for new funding to become harder to come by.
“Our advice to founders: Call every debt line, close all primary rounds, do it now, and be willing to make concessions,” Sethi said. “The restructuring will be significant.”
Already, the bank failure is affecting startups. Parker Conrad, CEO of software company Rippling, tweeted Friday that the company “accelerated” a switch to JPMorgan Chase when Silicon Valley Bank’s troubles became public Thursday.
But Rippling, which provides payroll and other services to companies, said pay runs scheduled to leave Silicon Valley Bank today have not yet been paid.
“The latest we heard from SVB this morning was that this was an operational delay and funds will be released,” Conrad tweeted, adding that the FDIC’s involvement made him skeptical of SVB’s claims. “Our top priority is to get our customers’ employees paid as soon as we possibly can, and we’re working diligently toward that on all available channels, and trying to learn what the FDIC takeover means for today’s payments.”
A bank failure of this magnitude may trickle down to taxpayers. Federal regulators will have to sell Silicon Valley Bank’s assets to cover its advances. If the federal deposit insurance fund is used, it will need to be replenished, Hurley said.
The bank’s problems represent one of the early signs of financial stress caused by the Federal Reserve’s yearlong campaign to raise interest rates. With inflation still uncomfortably high, the Fed is expected to continue raising rates. Investors now anticipate the central bank’s benchmark rate may rise to near 6% from a current target range of 4.5% to 4.75%.
Fed Chairman Jerome H. Powell says higher rates are needed to cool off an overheated economy and ease price pressures. But as rates go higher, additional financial losses are likely to emerge at other institutions.
“If the Fed keeps jacking up rates, it’s going to exacerbate the situation,” said Bert Ely, a veteran banking industry consultant.
The tech industry has been grappling with the changing economy and renewed pressure from Wall Street investors to cut costs and focus on profit after years of spending money to continuously grow their businesses.
During the pandemic, big companies such as Amazon, Facebook and Google hired tens of thousands of new workers to take advantage of the growth in demand for digital services as lockdowns forced people to work, shop and get their recreation through the internet. But as people returned to their in-person lives, and the stimulus funding pushed into the economy by the government dried up, the tech companies that had benefited the most from the pandemic-era economy saw their stock prices plummet.
Over the past several months, most of them have cut costs and fired workers, something that few have had to do over the past decade. The cuts have prompted soul-searching in Silicon Valley, where tech workers had grown accustomed to high salaries and constant demand for engineers and salespeople.
“I am hearing from dozens of founders about what to do at SVB,” Howard Lerman, the co-founder of business software company Yext, said on Twitter. “It’s an all-out bank run.”
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