Mystery of the SVB, How Does a Bank Collapse In 48 hours?

BUSINESS (B-TRAMS):

This week, Silicon Valley Bank (SVB), the go-to bank for US tech startups, faced a sudden bank run and capital crisis that led to its collapse and takeover by federal regulators on Friday.

SVB had specialized in providing financing for almost half of US venture-backed technology and health care companies since its founding in 1983. With $209 billion in total assets at the end of last year.

It was among the top 20 American commercial banks, However a classic run on the bank occurred due to several forces colliding, including the Federal Reserve’s aggressive raising of interest rates, which eroded the value of long-term bonds that SVB and other banks had invested in.

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At the same time, venture capital began to dry up, and startups drew down funds held by SVB, leading to a mountain of unrealized losses in bonds just as the pace of customer withdrawals was escalating.

Panic among key venture capital firms triggered by SVB’s announcement that it had sold securities at a loss and would sell new shares to shore up its balance sheet led to a plummeting of the bank’s stock on Thursday, dragging other bank shares down with it as investors feared a repeat of the 2007-2008 financial crisis.

By Friday, the bank had abandoned efforts to quickly raise capital or find a buyer, and California regulators intervened, shutting the bank down and placing it in receivership under the Federal Deposit Insurance Corporation.

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Despite initial panic on Wall Street, analysts said SVB’s collapse is unlikely to set off a broader contagion, as the banking industry is now much better capitalize and liquid than it  during the financial crisis.

Nevertheless, smaller banks that are disproportionately tie to cash-strapped industries like tech and crypto may face a rough ride, according to Ed Moya, senior market analyst at Oanda.

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The FDIC typically sells a failed bank’s assets to other banks, using the proceeds to repay depositors whose funds weren’t insured, but whether a buyer will emerge for SVB remains uncertain.