Silicon Valley Bank: Regulators take over as failure raises fears

US regulators have shut down Silicon Valley Bank (SVB) and seized control of its customer deposits in the biggest failure of a US bank since 2008.

The moves came as the firm, a major tech lender, struggled to raise cash to cover a loss from asset sales hit by higher interest rates.

Its problems led to a rush of customer withdrawals and sparked fears about the state of the banking sector.

Officials said they acted to “protect insured depositors”.

Silicon Valley Bank was facing “inadequate liquidity and insolvency,” banking regulators in California, where the firm is headquartered, said when they announced the takeover.

The Federal Deposit Insurance Corporation (FDIC), which typically protects deposits up to $250,000, said it had taken over the roughly $175 billion. (£145bn) in deposits with the bank, the 16th largest in the US.

Bank offices would reopen and customers with insured deposits would have access to funds “by Monday morning”, it said, adding that money raised from the sale of the bank’s assets would go to uninsured depositors.

With many of the firm’s clients in that position, the situation has left many businesses with money tied up in the bank worried about their future.

“I’m on my way to the branch to find my money right now. Tried to transfer it yesterday didn’t work. You know those moments when you might be really screwed but you’re not sure? This is one of those moments ,” one startup founder told the BBC.

Another founder of a health care startup said, “Literally three days ago, we just hit a million dollars in our bank account… And then this happens.”

He managed to get the money transferred to another account 40 minutes before the deadline. “It was pending. And then this morning, it was there. But I know other people who did the same thing minutes after me, and it hasn’t transferred.”

“It was a crazy situation,” he said.

The collapse came after SVB said it was trying to raise $2.25bn.

The news caused investors and customers to flee the bank. Shares saw their biggest one-day drop on Thursday, falling more than 60% and falling further in after-hours sales before trading was halted.

Concerns that other banks could face similar problems led to widespread selling of bank stocks globally on Thursday and early Friday.

In a speech in Washington on Friday, US Treasury Secretary Janet Yellen said she was monitoring “recent developments” at Silicon Valley Bank and others “very carefully”.

She later met with top banking regulators, where the Treasury said she expressed “full confidence in banking regulators to take appropriate action in response and noted that the banking system remains resilient”.

SVB did not respond to a request for comment.

The company is a major lender to early-stage companies and is the banking partner for nearly half of US venture-backed technology and healthcare companies that listed on the stock markets last year.

The firm, which started as a California bank in 1983, expanded rapidly over the past decade. It now employs more than 8,500 people globally, although most of its operations are in the United States.

But the bank has been under pressure as higher interest rates make it harder for start-ups to raise money through private fundraising or share sales, and more customers pulled deposits, moves that spiraled this week.

In Silicon Valley, the fallout from the collapse was widespread, as companies faced questions about what the collapse meant for their finances.

Even companies with no direct business were affected, as were customers of Rippling, a payroll software company that had used SVB. It warned that current payments could face delays and said it was switching business to another bank.

SVB’s UK subsidiary said it will be placed into insolvency from Sunday evening.

The Bank of England said Silicon Valley Bank UK would stop making payments or accepting deposits in the meantime, and the move would allow individual depositors to be paid up to £85,000 from the UK’s deposit insurance scheme.

“SVBUK has a limited presence in the UK and no critical functions supporting the financial system,” the BoE added.

As well as being a major blow to the technology industry, SVB’s collapse has raised concerns about the wider risks banks face as rapid interest rate rises hit bond markets.

Central banks around the world – including the US Federal Reserve and the Bank of England – have sharply raised borrowing costs over the past year as they try to curb inflation.

However, as interest rates rise, the value of existing bond portfolios typically declines.

These declines mean that many banks are sitting on significant potential losses – although the change in value would not typically be a problem unless other pressures force the companies to sell the holdings.

Shares of some major U.S. banks recovered on Friday, but the selloff continued to hit smaller companies, forcing a trading halt in names like Signature Bank and others.

The tech-heavy Nasdaq ended the day down 1.7%, while the S&P 500 fell 1.4% and the Dow closed 1% lower.

Major European and Asian indices also closed lower, with the FTSE 100 down 1.6%.

Alexander Yokum, equity analyst at CFRA, said banks that specialize in single industries are seen as vulnerable to rapid withdrawals like the one that hit SVB.

“Silicon Valley Bank wouldn’t have lost money if they hadn’t run out of cash to give back to their customers,” he said. “The issue was that people wanted money and they didn’t have it — they had it invested and those investments had fallen.”

“I know there’s a lot of fear, but it’s definitely company-specific,” he said.

“The average Joe should be fine,” he added, but he said tech companies would likely find it even more difficult to raise money. “It’s not good,” he said.