The Government shuts down a Silicon Valley bank

Silicon Valley Bank was shut down by US authorities on Friday in a stunning decision that sent banking shares tumbling as markets worried about probable spillover effects from America’s biggest banking collapse since the 2008 financial crisis.

SVB, a significant lender to US startups since the 1980s, had its assets seized by US authorities after a run on deposits rendered it impossible for the medium-sized bank to continue operating on its own.

SVB, a little-known US bank that specialized in funding startups, had grown to be the 16th largest bank in terms of assets by the end of 2022 with $209 billion in assets and over $175.4 billion in deposits.

Its demise marks the second-largest retail bank failure in American history and the biggest bank failure since Washington Mutual in 2008, respectively.

Treasury Secretary Janet Yellen called an urgent meeting of the top US financial regulators in response to the abrupt fall.

According to a Treasury statement, “Secretary Yellen expressed complete confidence in banking regulators to take necessary actions in response and underlined that the financial system remains robust and regulators have effective instruments to address this type of situation.

The struggles of SVB, a bank located in the shadow of one of the largest IT corporations in the world, have sparked worries that other banks may follow suit as weaker lenders are squeezed by the effects of high inflation and rising interest rates.

On a soggy day in Santa Clara, California, in front of the SVB offices, anxious clients spoke in tight groups, speculating about how they could get their money out as word of the government seizure spread.

One client, who requested anonymity and appeared to be wearing a t-shirt and sweats, claimed that his firm utilized the bank for payroll.

“The situation is not ideal. He continued, saying he was concerned about his employees, “A lot of really top tier (venture capital firms) have extremely large amounts of exposure here.

emergency measure

A day after the four largest American banks lost a staggering $52 billion in market value due to SVB’s problems, the top European banks were also in the red, with Deutsche Bank dropping as much as 10% at one point.

Although Yellen told a congressional panel that she was “watching” a select institutions, shares of Wall Street heavyweights Bank of America, Wells Fargo, and Citibank sawsawed on Friday.

The announcement that SVB had been shut down and transferred to the Federal Deposit Insurance Corporation in Washington, D.C., by the California Department of Financial Protection and Innovation (DFPI), came shortly after.

The emergency action safeguards clients with deposits of up to $250,000 and, more importantly, buys time to locate a potential buyer for whatever is left of the troubled Silicon Valley lender.

After failing to weather the crisis on its own, SVB was reportedly in talks with prospective purchasers, according to CNBC on Friday.

In a note from Patrick O’Hare of Briefing.com, he stated, “The question today is whether SVB difficulties are SVB’s issues or the beginning of a wider crisis for the banking sector.

There appears to be room in the stock market for it to be more of a company-specific issue, or at the very least, not a crippling systemic problem.

Prior to the shutdown, trading in SVB was suspended after the bank’s stock lost more than 60% of its value as a result of the revelation that it had lost $1.8 billion in securities sales made in a bid to raise money.

Investors worry that other banks may see comparable losses as they seek to raise funds in the face of steadily rising interest rates and forceful central bank action to rein in decades-high inflation.

Something always breaks severely during or after a Fed raising cycle, Deutsche Bank analysts wrote in a note. “We’ll have to observe how this tale unfolds,” they added.

“Does this signal the beginning of a larger problem or just another little blip on this front? It’s difficult to say, but I would be shocked if this boom-and-bust cycle didn’t claim many more lives.