$175 Billion in Deposits Under FDIC Control as Silicon Valley Bank Becomes Largest U.S. Bank Failure Since 2008 Financial Crisis.
On Friday, the largest U.S. bank failure since the 2008 financial crisis occurred as regulators took control of Silicon Valley Bank and appointed the Federal Deposit Insurance Corporation as the receiver. The lender, which served some of the biggest names in the technology industry, saw nearly $ 175 billion in customer deposits fall under the FDIC’s control. Here is what we know so far about this developing story.
Regulators Take Over the Bank Less than two days after Silicon Valley Bank tried to convince clients not to withdraw their money, the California Department of Financial Protection and Innovation shut down the bank and appointed the FDIC as the receiver. In response, the FDIC created a new bank, the National Bank of Santa Clara, to hold the deposits and assets of the failed bank. The FDIC announced that the new entity would begin operating on Monday and that checks issued by the old bank would continue to clear.
Silicon Valley Bank Was Caught by Higher Interest Rates Flush with cash from high-flying start-ups, Silicon Valley Bank purchased significant amounts of bonds over a year ago, investing most of its deposits with the aim of earning a return. This strategy proved successful until the Federal Reserve raised interest rates last year to reduce inflation. Simultaneously, start-up funding began to dry up, putting pressure on many of the bank’s clients, who then began to withdraw their money. To fulfill these requests, Silicon Valley Bank had to sell off some of its investments when their value had declined. The bank disclosed a loss of almost $2 billion on Wednesday, which ultimately led to its collapse.
Silicon Valley Bank’s Failure Raises Concerns about Other Banks Although Silicon Valley Bank’s $209 billion in assets pales in comparison to the nation’s largest banks, the possibility of bank runs can occur when customers or investors start withdrawing their deposits. This potential outcome raised concerns that other banks’ customers might panic and do the same. The failure of Silicon Valley Bank caused shares of First Republic Bank and Signature Bank to drop more than 20% on Friday. Nonetheless, shares of the largest banks, including JPMorgan, Wells Fargo, and Citigroup, rebounded on Friday after declining on Thursday.
Young Companies Struggle to Get Their Money Out of the Bank Silicon Valley Bank provided banking services to almost half of venture capital-backed technology and life-science companies, according to its website, and over 2,500 venture capital firms, including Lightspeed, Bain Capital, and Insight Partners. Some entrepreneurs whose funds are frozen at the bank are turning to loans to make payroll, as the start-up ecosystem tries to comprehend the bank’s implosion.
Conclusion Silicon Valley Bank’s collapse highlights the potential consequences of relying heavily on investments and the subsequent risk of being caught off guard by changes in the market. Nonetheless, the FDIC’s quick response and the creation of the National Bank of Santa Clara suggest that regulators are taking measures to mitigate the impact of the bank’s failure on the financial sector.
