Silicon Valley Bank becomes biggest bank since 2008 financial crisis to be taken over by FDIC

SVB Financial Group’s Silicon Valley Bank on Friday become the first major bank since the global financial crisis in 2008 to be taken over by the Federal Deposit Insurance Corp. in a sudden demise for a once-mighty lender to technology companies in its namesake region.

While it’s known as a sophisticated and dependable lender in Silicon Valley, the company succumbed to an old-fashioned bank run as it told investors late Wednesday that it needed to raise $2.25 billion to cover an unexpected drop in deposits.

SVB Financial bonds sank to 31 cents on the dollar, while trading of its stock
remained halted through the Friday session.

The Federal Deposit Insurance Corp. renamed the bank “Deposit Insurance National Bank of Santa Clara” as it took control on Friday.

The bank has issued no formal comment.

The main office and all branches of Silicon Valley Bank will reopen on Monday, the FDIC said.

The Federal Reserve, meanwhile, noted that it’s keeping an eye on the situation, while Treasury Secretary Janet Yellen said early Friday that she was closely monitoring “a few” financial institutions including SVB. She later offered a reassurance that the U.S. banking system remained resilient.

See: Washington is watching Silicon Valley Bank but does not see current troubles as systemic: bank analysts

“We believe the failure is more about Silicon Valley’s unique business model than it is about broader problems in the banking system,” analysts at TD Cowen said. “We continue to expect regulators to revamp liquidity rules in response to this failure, but do not expect any change for how most banks treat unrealized losses.”

Brian Bethune, an economics professor at Boston College, said that SVB Financial evidenced a “classic signaling problem” when it announced a need to raise $2.25 billion in capital.

“If you go out with an equity offering when there are adverse general market conditions, markets will view this as a signal of financial distress,” Bethune said. “[They] never should have gone with an equity offering.”

The bank’s sudden demise has taken Silicon Valley by surprise.

One longtime Palo Alto, Calif., corporate lawyer told MarketWatch that clients in the technology sector have grown worried over the fate of any financial activities or accounts with SVB Financial, known as a top lender to companies backed by venture-capital and private-equity firms.

“They were always seen as a very stable bank,” the lawyer said. “They were forced to take bailout money after the global financial crisis, but then they paid it back in a year. They’re known for doing that.”

As of Dec. 31, Silicon Valley Bank had approximately $209 billion in total assets and about $175.4 billion in total deposits.

Jay Ritter, a professor of finance at the University of Florida, said a rescue by one of the nation’s big banks seemed less likely, in light of an “anti-bigness” posture within the administration of President Joe Biden.

The FDIC could still include some sweeteners to work out a deal, like offering to cover losses from soured loans, and other banks could still step in to fill any hole the bank leaves in the IPO market.

“Certainly there will be some losses,” he said. “Not every tech company that they have lent money to is going to be successful.”

Unlike 2008, he said, today’s markets have not been swamped in foreclosures and a black hole in the mortgage-backed securities market.

However, he said, Silicon Valley Bank, through 2020 and 2021, received a massive inflow of deposits, which the company then invested in mortgage-backed securities.

“In the last year, when interest rates went up, the market value of those mortgage-backed securities dropped,” he said. “And that loss, basically, from speculating on interest rates, and losing, is the fundamental problem for Silicon Valley Bank.”

Before being halted early Friday, SVB Financial Group’s stock had tumbled more than 42% in premarket trades amid fears of a full-scale run on the bank.

Founders Fund, the San Francisco–based venture-capital fund co-founded by Peter Thiel, had advised companies to pull their money out of Silicon Valley Bank, according to a Bloomberg News report citing people described as familiar with the matter.

In a separate development, the Wall Street Journal reported that SVB Financial Group took out $15 billion in loans from the Federal Home Loan Bank of San Francisco at the end of 2022, compared with zero such borrowing in the year-earlier period, to ensure liquidity.

The bank pledged collateral of about three times what it borrowed to back the advances, the Journal reported, around the same time it sustained a 13%, or $25 billion, decline in deposits in the final three quarters of 2022, the Journal reported.

Goldman Sachs Group Inc.
had reportedly lined up an equity offering at $95 a share for SVB Financial to raise capital, but as the stock fell Thursday more customers pulled deposits from the bank and the deal died, according to a report by Dow Jones Newswires.

Centerview Partners and Sullivan & Cromwell LLP are advising SVB Financial on its options, according to reports.

Shares of SVB Financial ended down 60% in the regular trading day on Thursday after SVB disclosed large losses from securities sales and announced a dilutive stock offering along with a profit warning.

The bank was unprepared for rising interest rates, which have impacted its net interest income and net interest margin.

The SVB developments triggered losses among bank stocks generally amid fears that other institutions could find themselves in a similar position to that of SVB.

Joseph Lynyak, a partner at Dorsey & Whitney, said the FDIC move to take over SVB Financial will likely resemble the failure of IndyMac Bank in 2008. “The FDIC closed that bank but had not already lined up an assuming bank,” Lynyak said. “It took several weeks to find an investor — in that case, it was Steven Mnuchin who formed OneWest Bank as the successor bank to IndyMac Bank.”

The FDIC is likely negotiating a similar arrangement, Lynyak said. The result, he added, will likely be that “virtually all assets and liabilities of Silicon Valley Bank will be transferred to the assuming bank in a short period of time.”

On Friday, bank-sector stocks sought to achieve some stabilization, only to weaken in the latter stages of the day. The KBW Bank Index
ended 3.9% lower on the heels of a 7.7% drop in the previous session. The Financial Select SPDR ETF
dropped by 1.8%. The S&P 500
fell 1.5% on Friday, after falling 1.9% on Thursday.

JPMorgan analyst Vivek Juneja said Friday that the bank selloff was “overdone” given liquidity levels among bigger institutions. “They are more diversified with broader business models, have a lot of capital, are much better managed in regards to risk, and have a lot of oversight from regulators,” Juneja said.

Raymond James analyst David L. Long downgraded SVB Financial to market perform from outperform on a litany of issues including worsening cash burn from deposit outflows and the uncertain timing of a rebound in private-equity and venture-capital deal volume.

The bank has also faced a tighter net interest margin, or NIM, outlook because of a fresh increase in interest rates and rate-hike expectations, as well as dilution to earnings per share from the planned $2.25 billion capital raise.

Long also cited an increase in the risk of incremental NIM contraction and lower client fund balances.

Truist Securities analyst Brandon King cut SVB Financial group to a hold rating from a buy because the bank faces “too much uncertainty with deposits at risk,” he said in a Friday research note.

“The stock reaction today is evident of concerns around the bank’s liquidity and the potential for hold-to-maturity (HTM) securities sales, which could severely impair tangible capital and profitability,” King said. “Given these risks, we suggest that investors wait on the sidelines until there is more clarity on deposit outflows and the proposed capital raise of $2.25 billion.”

Bill Peters contributed to his report.

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