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Here’s How The Second Biggest Bank Collapse In US History Happened In Just 48 Hours

TechTechnologyHere's How The Second Biggest Bank Collapse In US History Happened In Just 48 Hours
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A Brinks armored truck is parked in front of the closed Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California.

Justin Sullivan | Getty Images

on Wednesday, Silicon Valley Bank was a well capitalized institution seeking to increase some capital,

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Within 48 hours, a panic inspired by the very venture capital community that SVB had served and nurtured ended the bank’s 40-year run.

regulator Close The SVB seized deposits on Friday and in the biggest US banking failure and second largest since the 2008 financial crisis. The company’s downward spiral began late Wednesday, when it surprised investors with news that it needed to raise $2.25 billion To shore up its balance sheet. What followed was the rapid collapse of a highly respected bank that had grown alongside its technology clients.

Even now, as the dust settles on the wind-down on the other side announced This week, members of the VC community are lamenting the role other investors played in SVB’s demise.

“It was a hysteria-induced bank run because of VCs,” Ryan Falvey, a fintech investor at Restive Ventures, told CNBC. “This is going to go down as one of the last cases of an industry thumbing its nose in spite of its face.”

Episode Latest Result federal ReserveActions to contain inflation with its most aggressive rate hike campaign in four decades. With startups worried, the effects could be far-reaching unable to pay Employees, venture investors may struggle to raise funds in the coming days, and the already battered sector may face deeper malaise.

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Shares of Silicon Valley Bank fell this week.

The collapse of the SVB has its roots in the dislocations caused by the high rates. As startup clients pulled out deposits for IPOs and private fundraising to keep their companies afloat in a cold climate, SVB found itself short on capital. The bank said late Wednesday that it had been forced to sell all of its available-for-sale bonds at a loss of $1.8 billion.

The sudden need for new capital coming on the heels of the collapse of the crypto-centric silvergate The bank triggered another wave of deposit withdrawals on Thursday as VCs instructed their portfolio companies to transfer funds, according to people with knowledge of the matter. Concern: A bank operating in SVB may pose a threat to the existence of startups that cannot tap their deposits.

SVB customers said they did not believe them after CEO Greg Baker urged them to “remain calm” in a call that began Thursday afternoon, and the stock’s decline continued unabated, reaching 60% by the end of regular trading. Importantly, Baker could not assure listeners that the capital raise would be the bank’s last, said a person on the call.

In total, customers withdrew $42 billion in deposits as of the end of Thursday, according to a California regulatory filing,

The regulator said that as of the end of trading that day, SVB had a negative cash balance of $958 million, according to the filing, and had failed to obtain sufficient collateral from other sources.

As of Friday, SVB shares continued to decline, the bank wasted effort Shares to be sold, CNBC’s David Faber reported. Instead, it was looking for a buyer, He informed. But the flight of deposits made the sales process difficult, and that effort even fail, Faber said.

On Friday evening, some SVB customers received emails assuring them that it was “business as usual” at the bank.

“I’m sure you’re hearing some buzz about SVB in the markets today, so wanted to reach out to provide some context,” one SVB banker wrote to a client, according to a copy obtained by CNBC.

“Everything is normal in SVB,” wrote the banker. “Obviously there can be questions and I want to make myself available if you have any concerns.”

Falve, a former SVB employee who launched his own fund in 2018, pointed to the highly interconnected nature of the tech investment community as a major reason for the bank’s sudden demise. Major funds including Union Square Ventures and Coteau Management blasted email His entire roster of startups in recent days, directed them to pull funds from SVB over concerns of running the bank. He said that social media has only increased terror.

Falvey said, “When you say, ‘Hey, get your deposit out, this thing’s going to fail,’ it’s like a fire screaming in a crowded theater.” “It’s a self-fulfilling prophecy.”

A customer stands outside the closed Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California.

Justin Sullivan | Getty Images

Falve, who started his career Wells Fargo and consulted for the bank seized during the financial crisis, said their analysis of SVB’s mid-quarter Updates gave him confidence He said the bank was well capitalized and could make all depositors whole. Even as rumors go, he advised his portfolio companies to keep their funds in SVB.

Now, thanks to a bank run that ended in the seizure of SVB, those who remained with SVB faced an uncertain time to get their money back. While insured deposits are expected to become available soon, the bulk of deposits held by the SVB were uninsured, and it is unclear when they will be freed.

“The advance deposit withdrawal has caused the bank to be unable to pay its obligations,” the California financial regulator said. “The bank is now bankrupt.”

This story is developing. Please check back for updates.

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