California regulators have
abruptly closed Silicon Valley Bank, a 40-year-old financial institution, which
catered to the tech industry and was the 16th largest U.S. bank. Its sudden
collapse caused a 60% drop in the company's stock on Thursday, and another 70%
on Friday, leading to fears of a bank run. Depositors, mainly technology
company workers and venture capital-backed companies, rushed to withdraw their
money as anxiety over the bank's balance sheet spread. Regulators stepped in,
with the California Department of Financial Protection and Innovation closing
the bank and appointing the Federal Deposit Insurance Corporation (FDIC) as
receiver. Silicon Valley Bank was the largest failure of a financial
institution since Washington Mutual in 2008 at the height of the financial
crisis more than a decade ago.
Silicon Valley Bank, founded
in 1983, grew rapidly with the explosion of businesses in the tech-focused
region, eventually expanding to more than a dozen states and countries
including Israel, Ireland, and Germany. Before its failure, it ranked as the
16th largest bank in the country, holding $210 billion in assets. It offered
business lending products such as loans to help finance acquisitions or
projects, private banking services, and other financial products. On Friday,
the California Department of Financial Protection and Innovation took
possession of the bank due to "inadequate liquidity and insolvency."
The FDIC created a new
institution, the Deposit Insurance National Bank of Santa Clara (DINB), and
transferred all insured deposits at Silicon Valley Bank to the new bank. All
insured depositors will have access to their insured deposits by March 13.
Meanwhile, uninsured depositors will receive "an advance dividend within
the next week" and a receivership certificate for the remaining amount of
their uninsured funds. The main office and its 17 branches will reopen for
business on March 13. The standard insurance from FDIC covers $250,000 for each
depositor per insured bank.
Silicon Valley Bank's heavy
exposure to the tech sector played a part in its downfall. Some of its tech
company clients were burning through cash faster than expected, resulting in
lower deposits than forecast, according to the bank. Silicon Valley Bank's
problems were exacerbated by rapidly rising interest rates over the last year,
which reduced the value of its bond holdings. Additionally, the bank made
balance sheet management errors by putting too much money into long-term bonds,
which became a problem when interest rates surged, causing "non-trivial
panic."
The bank's closure caused
widespread shock and confusion among its customers. Silicon Valley Bank's
sudden collapse is an unexpected event in a sector that has seen banks as
reliable and stable.