Current:Home > InvestA Silicon Valley lender collapsed after a run on the bank. Here's what to know-Angel Dreamer Wealth Society D1 Reviews & Insights
A Silicon Valley lender collapsed after a run on the bank. Here's what to know
View Date:2024-12-24 10:32:21
A bank that caters to many of the world's most powerful tech investors collapsed on Friday and was taken over by federal regulators, becoming one of the largest lenders to fail since the 2008 Global Financial Crisis.
California's banking regulators shut down Silicon Valley Bank and put it into receivership under the Federal Deposit Insurance Corp. (FDIC).
That effectively gives control of the bank to the FDIC, which created a new entity to oversee it.
Regulators announced the takeover after what was effectively a run on the bank. Depositors rushed to withdraw their money amid fears SVB wouldn't be able to meet redemption requests.
It was a collapse that sent shockwaves across the banking industry, hammering shares of other smaller and regional lenders.
Here's what to know about SVB.
What was Silicon Valley Bank?
Although it was not in the same league as, say, Goldman Sachs or J.P. Morgan Chase, Silicon Valley Bank, or SVB, punched above its weight during its 40-year history.
Based in Santa Clara, Calif., its clients included venture capital firms and startups, and it became a big player in the tech sector, successfully competing with bigger-name banks.
"They really developed a niche that was the envy of the banking space," says Jared Shaw, a senior analyst at Wells Fargo. "They are able to provide all the products and services any of these sophisticated technology companies, as well as these sophisticated venture capital and private equity funds, would need."
But it remained little known outside of tech circles — until this week.
So why is the bank in trouble now?
Silicon Valley's business boomed as tech companies did well during the pandemic. That filled the lender's coffers, and SVB had about $174 billion in deposits.
But in recent months, many of Silicon Valley Bank's clients had been withdrawing money at a time when the tech sector as a whole has been suffering.
SVB said earlier this week, that in order to make good on those withdrawals, it had to sell part of its bond holdings at a steep loss of $1.8 billion. Bonds and stocks have been hammered since last year, as the Federal Reserve has raised interest rates aggressively, and SVB also noted it wanted to pare down its bond portfolio to avoid further losses.
But that announcement spooked the bank's clients, who got worried about SVB's viability, and then proceeded to withdraw even more money from the bank — a textbook definition of a bank run.
That led to a major slump in SVB's shares. The bank's stock price fell by 60% on Thursday, and as its share price continued to sink overnight.
Trading was halted on Friday morning, and by midday, SVB had been taken over by the FDIC.
What does this mean for other banks?
Though the problems appear to be isolated at SVB, the run on the bank sparked concerns about the banking sector as a whole. On Thursday, shares of all kinds of lenders, including the big banks, sagged. J.P. Morgan, Wells Fargo, and Bank of America were all down about 5%.
Investors feared that other lenders, especially smaller and regional ones, would suffer a similar surge in withdrawals and would struggle to meet the redemptions.
The troubles at SVB come as Wall Street had already been on edge. Earlier this week, Silvergate, a California-based bank that caters to the cryptocurrency industry, announced plans to unwind its operations.
Yet by Friday, fears about the health of the broader banking sector had eased, even before the FDIC took over SVB.
Bank analysts at Morgan Stanley said in a note "the funding pressures facing" Silicon Valley Bank "are highly idiosyncratic and should not be viewed as a read-across to other regional banks."
"We want to be very clear here," they wrote. "We do not believe there is a liquidity crunch facing the banking industry."
Wells Fargo analyst Shaw also said other banks were hit by panic selling.
"It's really just a fear that has gripped the market, and is sort of self-perpetuating at this point," says Shaw.
What happens next?
The entity created by federal regulators to oversee SVB, the Deposit Insurance National Bank of Santa Clara, has quite a few things to sort out.
The FDIC said those with insured deposits with SVB, typically up to $250,000, would be able to access their money by no later than Monday.
The fate of those with deposits at SVB that exceed insurance limits is less certain, however, with the FDIC saying they will receive an "advance dividend" for a portion of their funds along with "certificates" accounting for their uninsured funds.
The regulator did not spell out what that would entail for these uninsured depositors.
Investors will also continue to monitor for any further impact on other banks. The Treasury Department said Secretary Janet Yellen discussed the situation at a meeting she convened with financial regulators.
"Secretary Yellen expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient and regulators have effective tools to address this type of event," the statement said.
veryGood! (4815)
Related
- Lane Kiffin puts heat on CFP bracket after Ole Miss pounds Georgia. So, who's left out?
- S Club 7 Singer Paul Cattermole Dead at 46
- Attitudes on same-sex marriage in Japan are shifting, but laws aren't, yet.
- Plant that makes you feel electrocuted and set on fire at the same time introduced to U.K. Poison Garden
- My Little Pony finally hits the Toy Hall of Fame, alongside Phase 10 and Transformers
- Kevin Spacey sexual assault trial: 5 key things to come out of the U.K. court as Elton John testifies
- How Love Is Blind's Chelsea Reacted to Watching Micah and Kwame’s Pool Scene on TV
- Listen live to President Biden speak from the U.N. climate summit
- FC Cincinnati player Marco Angulo dies at 22 after injuries from October crash
- The Fate of All Law & Order and One Chicago Shows Revealed
Ranking
- Residents urged to shelter in place after apparent explosion at Louisville business
- Elton John bids farewell in last show of final tour
- South Africa gas leak near Johannesburg leaves 16 dead, including 3 children
- France protests ease after weekend riots over police shooting of teen
- US Diplomats Notch a Win on Climate Super Pollutants With Help From the Private Sector
- G-20 leaders commit to reach carbon neutrality, but leave the target date in question
- Video shows the moment a 6-year-old boy fell 40 feet from a zip line in Mexico — and survived
- The Biden administration sold oil and gas leases days after the climate summit
Recommendation
-
More human remains from Philadelphia’s 1985 MOVE bombing have been found at a museum
-
Oil companies face 'big tobacco moment' in Congress over their climate policies
-
Plant that makes you feel electrocuted and set on fire at the same time introduced to U.K. Poison Garden
-
At least 51 people killed in road accident in western Kenya, 32 injured, police and Red Cross say
-
US Diplomats Notch a Win on Climate Super Pollutants With Help From the Private Sector
-
Nations are making new pledges to cut climate pollution. They aren't enough
-
Britt Robertson Marries Paul Floyd in Star-Studded Ceremony
-
Palestinians flee Israel's raid on West Bank refugee camp as several hurt in Tel Aviv car attack