March 12: US regulators on Friday shut down Silicon Valley Bank (SVB) and took control of its customer deposits in the largest failure of a US bank since 2008.
According to the BBC, the moves came as the firm, a key tech lender, was scrambling to raise money to plug a loss from the sale of assets affected by higher interest rates.
Its troubles prompted a rush of customer withdrawals and sparked fears about the state of the banking sector.
Reuters reported that the sudden collapse shook global markets and left billions of dollars belonging to companies and investors stranded.
The lender was ranked as the 16th biggest in the US at the end of last year, with about $209 billion in assets, the news agency added.
Silicon Valley Bank faced "inadequate liquidity and insolvency", BBC quoted banking regulators in California, where the firm has its headquarters, as saying during the takeover.
As it tried to raise capital to offset fleeing deposits, the bank lost $1.8 billion on Treasury bonds whose values were torpedoed by the Fed rate hikes, according to Reuters.
“Silicon Valley Bank's failure is the largest since Washington Mutual went bust in 2008, a hallmark event that triggered a financial crisis that hobbled the economy for years. The 2008 crash prompted tougher rules in the United States and beyond.”
The genesis of SVB's collapse lies in a rising interest rate environment, Reuters further said adding, as higher interest rates caused the market for initial public offerings to shut down for many startups and made private fundraising more costly, some SVB clients started pulling money out.
“To fund the redemptions, SVB sold a $21 billion bond portfolio consisting mostly of U.S. Treasuries on Wednesday, and said it would sell $2.25 billion in common equity and preferred convertible stock to fill its funding hole. By Friday, the collapsing stock price had made its capital raise untenable and sources said the bank tried to look at other options, including a sale, until regulators stepped in and shut the bank down.”
The last FDIC-insured institution to close was Almena State Bank in Kansas, on October 23, 2020.
According to Reuters, the problems at SVB underscore how a campaign by the U.S. Federal Reserve and other central banks to fight inflation by ending the era of cheap money is exposing vulnerabilities in the market. Some analysts forecast more pain for the sector as the episode spread concern about hidden risks in the banking sector and its vulnerability to the rising cost of money.