The Collapse of Silicon Valley Bank, 10 Days that Shook the Market

Dream - On March 10, 2023, Silicon Valley Bank (SVB), one of the leading lenders in the startup ecosystem, collapsed.

The turmoil has led to the seizure of Silicon Valley Bank and Signature Bank, private sector bailouts from regional US lender First Republic Bank, and the takeover of troubled Swiss Credit Suisse by its competitor, UBS.

Silicon Valley Bank was first established in 1983. Forty years later, the bank had to swallow a bitter pill: bankruptcy.

Silicon Valley Bank started in 1983 after being conceived by Bill Biggerstaff and Robert Medearis through a poker game, according to the bank's own history.

(Silicon Valley Bank m-banking/STR)

The founders' goal was to provide banking services for technology startups in Silicon Valley. Their first office was in San Jose.

In 1987, the company began trading shares on Nasdaq. A year later, it completed its IPO and raised $6 million in equity.

The bank gradually expanded around Silicon Valley and then to the East Coast in 1990 with an office in Massachusetts. In the 1990s, the company opened offices across the US.

After supporting young technology startups during the dot-com bubble of the 1990s, the company narrowly avoided disaster when the bubble burst and SVB's stock fell more than 50% in 2001.

SVB opened an office in Israel in 2008 and branches in the UK and joint ventures in China in 2012, according to the bank's timeline. Other offices followed in Europe and Canada in the past decade.

(Customers queue to withdraw deposits at Silicon Valley Bank/Guardian)

The root of Silicon Valley Bank's failure can be traced back to the early days of the coronavirus pandemic when the Federal Reserve kept interest rates near zero to stimulate growth during a severe economic contraction.

The technology sector benefited greatly from cheap money flowing in and triggered sky-high valuations that analysts believe may have been exaggerated.

SVB was one of the main beneficiaries of this bonanza. In 2021, venture-backed startups raised a total of $330 billion or IDR 4,978 trillion, which was astonishing—twice the amount from the previous year.

In just one year, SVB experienced a 100% increase in the amount of money deposited into its accounts.

In 2018, SVB had deposits of $49 billion or IDR 739 trillion. By the end of 2020, that number doubled to $102 billion or IDR 1,538 trillion. In 2021, the bank held $189.2 billion or IDR 2,854 trillion.

By the end of 2022, the amount slightly decreased to $175.4 billion or IDR 2,646 trillion as clients were bombarded by a weak market for initial public offerings. Recently, over 90% of the bank's deposits were above the federal insurance threshold of $250,000 or IDR 3.7 billion per account.

SVB had invested cash into long-term mortgage-backed securities and bonds with higher yields. However, when the Fed raised interest rates, the value of those investments plummeted.

Given the decline in revenue in the technology sector in recent months, the bank struggled to close the gap in its financial balance.

Here is a timeline of major events related to the turbulence in the global banking industry:

November 2022
JPMorgan warned that the "unrealized losses" of Silicon Valley Bank could pose serious risks, according to a report reviewed by the New York Post.

February 27, 2023
Greg Becker, CEO of SVB, sold $3.6 million worth of company shares less than two weeks before the company revealed its level of losses.

Becker sold 12,451 shares—marking the first time in over a year that the CEO sold shares of the parent company SVB Financial Group, according to regulatory filings.

Moody's Investors Service, a risk management firm, told SVB executives that they were preparing to downgrade its credit rating.

March 8, 2023
Silvergate Capital, a bank focused on cryptocurrency, announced it would cease operations and liquidate its assets after a bank run forced the California lender to sell some of its debt securities.

Silicon Valley Bank alarmed investors when it said it needed to shore up its balance sheet and raise $2 billion or IDR 30 trillion in capital. It was forced to sell a portfolio of bonds with losses of $1.8 billion or IDR 27 trillion.

In a letter to clients, Greg Becker, the CEO of Silicon Valley Bank, said the bank was in a "financial position to weather ongoing market pressures," but he noted that customer deposits were lower than expected in February.

(Greg Becker, CEO of Silicon Valley Bank/Wall Street Journal)

Moody's, the credit rating agency, downgraded the bank's bond rating and cut its outlook to negative from stable.

March 9, 2023
During a conference call, Silicon Valley Bank CEO Greg Becker urged venture capital firms to remain calm. However, panic spread on social media among investors.

Bill Ackman, a billionaire investor, stated that Silicon Valley Bank could fail and would need a bailout.

In a note sent to clients, a Silicon Valley Bank executive wrote that the bank was "actually quite healthy, and it is disappointing to see so many smart investors tweeting otherwise."

The previous day's announcement from Silicon Valley Bank triggered a wave of customer withdrawals, and its stock plummeted by 60%.

Investors and depositors withdrew $42 billion or IDR 633 trillion in a single day, causing SVB's stock to drop more than 60%, with its bonds posting record declines.

With the bank on the brink of collapse, CEO Greg Becker urged clients to "stay calm."

March 10, 2023
Silicon Valley Bank went bankrupt after running out of cash deposits. It was reported to be working with financial advisors until morning to find buyers.

By midday, regulators took over Silicon Valley Bank, the country's 16th largest bank, and the Federal Deposit Insurance Corporation was appointed as the receiver.

The 40-year-old financial institution's failure became the largest bank collapse since the 2008 financial crisis, putting nearly $175 billion of customer deposits under the control of regulators.

The shockwaves from Silicon Valley's distress reverberated throughout parts of the banking sector, and investors began dumping bank stocks, including shares of First Republic, Signature Bank, and Western Alliance. Many of these institutions serve specialized clients. The largest banks in the country seem isolated from the fall.

US Treasury Secretary Janet L. Yellen reassured investors that the banking system remains strong.

(US Treasury Secretary Janet L. Yellen/NPR)

Signature Bank, a 24-year-old New York-based institution that primarily lends to real estate companies and law firms, saw a surge in withdrawals from its coffers.

March 12, 2023
To prevent banking contagion, regulators seized Signature Bank. To some extent, the bank with 40 branches became a victim of panic around Silicon Valley Bank.

The Federal Reserve, the Department of the Treasury, and the Federal Deposit Insurance Corporation or FDIC jointly announced that "depositors will have access to all their money starting Monday, March 13" and that "no losses from the failure of any bank will be borne by taxpayers."

FDIC. proposed "systemic risk exemption," which allows the government to reimburse uninsured depositors to prevent dire consequences for the economy or financial instability.

And the Fed announced it would create an emergency loan program, with the approval of the Treasury Department, to provide additional funds to qualifying banks and help ensure that they can "meet the needs of all their depositors."

March 13, 2023
President Joe Biden, in his speech, said that the US banking system is safe and insisted that taxpayers will not bear any bailout funds. “This is an important point,” emphasized Biden. “No losses will be borne by taxpayers.”

(US President Joe Biden/NPR)

Regional bank stocks plummeted, with First Republic taking the hardest hit, dropping by 60 percent.

HSBC announced it would acquire Silicon Valley Bank's subsidiary in the UK. A buyer is being sought for the parent company of Silicon Valley Bank, which includes asset management and securities divisions, and excludes the commercial bank now under FDIC control.

March 14, 2023
The Department of Justice and the Securities and Exchange Commission or SEC reportedly started investigating the collapse of Silicon Valley Bank.

FDIC said the record $40 billion withdrawal from the US Treasury Department on Friday due to the takeover of Silicon Valley Bank would not affect when the Treasury Department runs out of operating room under the debt ceiling.

The Federal Reserve is considering stricter rules and oversight for midsize banks, according to sources familiar with the matter.

Review of the $209 billion bank failure conducted by SVB under Barr could result in strengthened rules on banks in the $100 billion to $250 billion range.

March 15, 2023
Credit Suisse shares plunged 24 percent, hitting a record low. The Swiss National Bank, the central bank of Switzerland, said it would intervene to provide financial support to Credit Suisse if necessary.

On Wall Street, the S&P fell 0.6 percent at the close of trading, reversing some of the previous day's rally as investor concerns about the health of the banking industry resurfaced.

March 16, 2023
First Republic Bank received deposits of $30 billion from nearly a dozen of the largest banks in the United States, including JPMorgan Chase, Wells Fargo, and Morgan Stanley. besieged bank stocks closed up 10 percent.

Credit Suisse said it would borrow $54 billion from the Swiss National Bank.

The Federal Reserve announced that on Wednesday, the bank had borrowed $11.9 billion from the emergency loan program launched on Sunday to support the banking system.

Janet L. Yellen testified before the Senate Finance Committee and tried to reassure the public that American banks remain "healthy."

March 17, 2023
Stocks of many banks continued their dizzying decline, erasing the gains from the previous day.

First Republic, the besieged regional lender, lost a third of its already depressed value on Friday. The S&P 500 index fell about 1.1 percent - the worst trading day in a week.

March 19, 2023
Switzerland's largest bank, UBS, agreed to acquire troubled rival Credit Suisse for $3.2 billion. To help facilitate the deal, the Swiss National Bank agreed to lend up to 100 billion Swiss francs to UBS. And the Swiss financial regulator waived $17 billion of Credit Suisse bonds and eliminated the need for UBS shareholders to vote on the deal.

(Credit Suisse Bank in Switzerland also shaken by the closure of SVB/Mint)

The Federal Reserve and five other central banks took steps to ensure that the dollar remains available in a move intended to ease tensions in the global financial system.

The Federal Deposit Insurance Corporation said it has signed an agreement to sell 40 former Signature Bank branches, which were taken over by US regulators on March 12, to New York Community Bancorp. (eha)

Source: New York Times, NPR. New York Post, Al Jazeera