Silicon Valley Bank (SVB) went down on Friday morning in the second-biggest major bank failure in US history, after a spectacular 48 hours that saw a banking collapse and a capital catastrophe.
SVB, an IT lender, was shut down by California authorities, and the FDIC (US Federal Deposit Insurance Corporation) took over its operations. The FDIC is acting as a receiver, which normally means it will liquidate the bank's assets to pay back its clients, including depositors and creditors.
The FDIC has guaranteed that any depositors who have their funds in an insured account would have complete access to their funds by Monday am at the latest. It stated it will give uninsured depositors an "advance dividend within the next week," per CNN.
On Wednesday, SVB reported that it had sold several instruments at a loss and that it would issue $2.25 billion worth of additional shares to strengthen its balance sheet. This was when everything began to fall apart. Venture capital firms panicked and encouraged businesses to withdraw their money from the bank.
Panic Caused Crash
On Thursday, the company's shares plummeted, causing a domino effect among financial institutions. SVB stopped its shares and gave up on raising funds or selling by Friday morning.
The FDIC usually intervenes after the market closes, but it took control mid-morning.
According to Better Markets CEO Dennis M. Kelleher, "SVB's health worsened so swiftly that it couldn't endure just five more hours." He explained that it was caused by Silicon Valley Bank depositors' rapid withdrawals that drove the bank bankrupt and a typical bank run necessitated an intraday closure.
The Silicon Valley Bank collapse arises largely from the Federal Reserve's relentless interest rate increases over the last year.
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SVB Collapse Means Worse Times For IT Startups
Rising rates hit tech particularly hard, undermining the value of tech companies and making it impossible to obtain cash, Moody's senior economist Mark Zandi said. As a result, several IT companies used the money on deposit at SVB to continue running their businesses.
Garry Tan, president and CEO of Y Combinator, says the current startup environment is a worse moment for the Silicon Valley Bank collapse.
Several firms have closed or had to lay off employees recently as their founders voiced concerns about the rapid depletion of available funds, NPR reported.
The fall of Silicon Valley Bank, a financial backbone of the startup community, compounds the already difficult situation.
Tan noted that the decline in venture capital investment was already well underway, which makes it a very difficult time for the Silicon Valley Bank collapse to happen.
In a statement released on Friday, the FDIC confirmed that the lender's headquarters in Santa Clara, California, and its 17 offices in California and Massachusetts, would reopen on Monday.
A broker-dealer operated by the bank's former parent company, SVB Securities, declared on Saturday that the demise of Silicon Valley Bank will not have a significant effect on its operations.
Semafor, a news website, cited sources acquainted with the situation on Saturday in reporting that some firms with assets at the failing bank are already getting bids from hedge funds to acquire their stranded accounts for as low as 60 cents on the dollar, according to Inquirer.
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