The largest bank to fall since the Great Recession of 2008 was Silicon Valley Bank, which had as clients some of the biggest names in the technology industry. The move gave the Federal Deposit Insurance Corp. control over nearly $175 billion in customer deposits.
Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation on Friday, less than two days after the bank pleaded with customers not to withdraw their funds due to worries that it was running low on available cash. What we know about this unfolding story is mentioned below.
What Happened To Silicon Valley Bank (SVB)?
Silicon Valley Bank was a well-capitalized financial institution that posted a fundraising notice on Wednesday. SVB’s 40-year run came to an end within 48 hours due to a panic caused by the venture capital community it had serviced and developed.
In the greatest U.S. bank collapse since the 2008 financial crisis and the second-largest ever, regulators closed SVB on Friday and seized its money. Late on Wednesday, the company stunned investors by announcing it needed to raise $2.25 billion to shore up its balance sheet, marking the beginning of its downward spiral. A reputable bank that had thrived alongside its technological clients suddenly went bankrupt.
Members of the VC community continue to express regret about the part that other investors played in the demise of SVB even as the dust begins to settle on the second bank wind-down revealed this week.
For Ryan Falvey, a fintech investor at Restive Ventures, this “was a hysteria-induced bank run triggered by VCs,” as he explained to CNBC. This will be remembered as one of the most extreme examples of an industry ignoring a problem in favour of a solution.
This incident is the latest impact from the Federal Reserve’s most aggressive rate-hiking campaign in four decades, which was undertaken to combat inflation. It could have far-reaching effects, including the possibility that businesses won’t be able to pay their workers in the following days, venture capitalists won’t be able to raise funding, and that an already-battered sector would take a hit.
Higher rates have caused dislocations, which ultimately led to SVB’s collapse. SVB ran out of money as its startup clients withdrew deposits to keep their businesses afloat in the frigid environment for IPOs and private fundraising. The bank announced late Wednesday that it has sold all of its bonds that were eligible for sale for a loss of $1.8 billion.
On Thursday, investors reportedly ordered their portfolio businesses to relocate funds as a result of the unexpected demand for capital following the bankruptcy of crypto-focused Silvergate bank. The worry is that a bank run at SVB could make it impossible for startups to use their deposits.
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Customers of SVB complained that CEO Greg Becker did not inspire trust when he told them to “remain cool” at the outset of a conversation on Thursday afternoon. The stock kept falling, and by the end of regular trading, it was down to 60%. A person on the call said that it was important that Becker couldn’t promise that the capital raise would be the bank’s last.
The Final Strike That Lead To The Collapse Of SVB
California regulators report that clients withdrew a whopping $42 billion in deposits before Thursday’s close. The statement states that by the end of business that day, SVB had a negative cash balance of $958 million and had not been able to get sufficient collateral from other sources. You can check the official tweet of Bernie Sanders below.
One ex-SVB employee named Falvey, who started his own fund in 2018, cited the interconnected structure of the tech investing community as a major factor in the bank’s unexpected downfall.
Union Square Ventures and Coatue Management, two prominent VC firms, have emailed their entire startup portfolios in recent days, urging them to move their money out of SVB due to fears of a bank run. The use of social media, he pointed out, simply made things worse.
Partner at TSVC and fellow venture capitalist Spencer Greene has spoken out against those who “were wrong on the facts” regarding SVB’s viewpoint. “It appears to me that there was no liquidity concern until a few of VCs called it,” Greene remarked. “They were irresponsible, and then it became self-fulfilling.”
Reports Also Say That Is Is Business As Usual
Customers of SVB got emails on Thursday evening assuring them that the bank was operating normally. One SVB banker wrote to a client, “I’m sure you’ve been hearing some noise about SVB in the markets today so wanted to reach out to provide some background.”
“It’s business as usual here at SVB,” the banker reassured his clients. “Understandably there may be questions and I want to make myself available if you have any concerns.”
Stock in SVB continued to fall on Friday, prompting the bank to abandon efforts to sell shares, as reported by David Faber. He said that instead, it was looking for a buyer. Nonetheless, Faber said that the sale procedure was complicated by the outflow of money and ultimately unsuccessful. You may also check the official tweet by Robert W Malone in which he says that the collapse of Silicon Valley Bank is a metaphor for the entire West Coast woke culture.
Falvey, who began his banking career at Wells Fargo, expressed optimism after seeing SVB’s mid-quarter update on Wednesday. He said that the bank had enough money to pay back everyone who had put money in it. As rumours spread, he even told the companies he worked with to keep their money at SVB.
Those who kept their money at SVB after the bank run that led to its seizure now face a potentially lengthy wait to get it back. Even though insured deposits could be available as early as Monday, the majority of deposits held by SVB were not insured, and it is not clear when they will be released.
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