The news: Silicon Valley Bank has become the largest U.S. bank to fail since the 2008 crisis, when the California Department of Financial Protection and Innovation closed it on Friday and placed it under the supervision of the Federal Deposit Insurance Corporation.
The FDIC created a new bank, the National Bank of Santa Clara, to hold the deposits and other assets of the bankrupt SVB. In a press release, the agency said the new entity would be operational on the morning of March 13 and checks issued by the old bank would continue to clear.
How SVB’s collapse unfolded: For 40 years, SVB was the preferred lender to some of the biggest technology companies in the world. But at the end of last week, the bank’s shares plunged and it fell victim to a bank run as venture capitalists feared it was running out of cash and advised their start-up clients to withdraw their funds from the bank.
What spooked investors? Three surprise revelations from the SVB sent its shares plummeting.
The Santa Clara-based bank first announced that it had sold $21 billion of Treasuries, in which it was heavily invested. SVB then said it was arranging a $2.25 billion share sale to shore up its balance sheet. The startup-focused bank later lowered its net interest income forecast to a steeper decline.
The news, which closely followed the collapse of Silvergate, rocked investors and the four largest US banks lost more than $50 billion in market value while shares of European lenders also fell.
SVB’s vulnerabilities exposed: The bank was a major lender to early-stage tech and fintech companies, partnering with nearly half of all US venture-backed startups. This made it more vulnerable than Wall Street banks to the tough start-up climate as fundraising became more difficult and startups began cashing in their reserves.
The announcement of the sale of SVB shares also came at a bad time. Coinciding with the folding of crypto bank Silvergate, it scared off investors and some of its customers, sparking a classic bank run.
Who is impacted: SVB client startups may have short-term issues with payroll and other immediate expenses. Other banks will now be acutely aware of their exposure to startup lending and whether the contagion is spreading to other smaller lenders with strong tech ties. The big banks saw their stock prices crash first, but could likely benefit from being seen as comparatively safer havens.
The crisis offers evidence of serious problems in the US venture capital ecosystem and could hurt startups’ chances of weathering the global economic downturn.