The bank run and capital downturn that precipitated the second-largest collapse of a major bank in the US’s historical past brought Silicon Valley Bank to its knees early on Friday morning.
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The technology lender was put out of business by California regulatory authorities, who then turned it over to the Federal Deposit Insurance Corporation of the United States. The FDIC is currently acting as a recipient, which generally means that it will expropriate the bank’s resources in order to pay back the institution’s customers, which include depositors and creditors.
Policyholder depositors will now have complete access to their funds by no later than Monday, as stated by the FDIC, a government entity that guarantees bank deposits and regulates banking institutions. An “advance dividend within a week’s time will be distributed to uninsured account holders, the company said.
Silicon Valley was very connected to the technology sector, and there isn’t much chance that the turmoil in the months before the Great Recession will happen again in the financial sector. Although the financial sector has been experiencing tension all week, the large banks have enough funds to mitigate a similar situation.
How did it happen?
On Wednesday, SVB revealed it had decided to sell a variety of securities at a loss and it would sell $2.25 billion worth of additional shares to solidify its capital structure. Major investment companies supposedly suggested their clients start withdrawing their funds from the bank.
On Thursday, the shares of the corporation plunged, bringing down the prices of other financial institutions with it. By Friday morning, all trading of SVB stocks had been brought to a halt, and the company had given up on its attempts to successfully raise funds or locate a buyer. Trading in shares of First Republic, PacWest Bancorp, and Signature Bank was also temporarily stopped on Friday.
The FDIC’s acquisition happened in the middle of the morning, which was interesting because the agency usually doesn’t step in until after the market has closed.
“SVB’s situation got worse so instantly that it was unable to endure even a couple of hours,” stated Dennis M. Kelleher, CEO of Better Markets. “That’s due to the fact that its bank customers took out their funds so quickly that the lender ran out of money and had to close during the day.” This is called an “iconic bank run.”
The Federal Reserve has increased borrowing costs quickly over the past year, which has hurt Silicon Valley Bank.
When rates of interest were close to 0, lenders bought long-dated, low-risk treasury notes. Banks have unrealized gains as the Fed increases borrowing costs to combat inflation.
Mark Zandi, Moody’s chief economist, added, higher rates hurt technology stocks and posed a challenge to raising money. That caused many tech giants to use SVB deposits to bankroll their activities. Zandi added, “Rising rates also have scaled back the valuation of their treasury as well as other assets which SVB required to reimburse stockholders.”
Reminiscences of 2008
Even after Wall Street’s initial shock over SVB’s run, which resulted in its stocks dropping like a stone, experts said the bank’s breakdown is not likely to trigger a ripple effect like the financial meltdown.
“The structure is as financially sound and solvent as it ever has been,” Zandi said. “The banks that are in chaos right now aren’t big enough to pose a real threat to the system as a whole.”
The impact of rate increases
SVB’s precipitous drop reflected other risky investments that have been outed in the market’s chaos over the last year.
“SVB’s institutional struggles portray a significantly bigger and much more pervasive systematic problem: the financial sector is resting on a massive amount of low-yielding investments that are now far submerged in water — and going to sink — thanks to the past year of rate hikes,” wrote Konrad Alt.