Silicon Valley Bank Financial Group (SVB), a relatively small California bank that works with high-risk tech startups, is shaking the financial world with an abrupt collapse—after two days of industry-shaking bad news.
Key Details
- SVB stock collapsed 60% on Thursday after the bank announced a $1.8 billion loss, sending the entire banking industry into a valuation spiral as JP Morgan, Bank of America, Wells Fargo, and Morgan Stanley lost $55 billion in market value.
- SVP selling was halted on Friday morning after premarket values dropped as much as 69%, and the bank began selling billions in assets to make up the shortfall, Bloomberg reports.
- The bank rushed to sell itself on Friday morning, following a failed capital raising campaign that hadn’t yet cleared the market but failed to find a buyer, according to CNBC.
- By midday Friday, SVP functionally collapsed, with the regulators from the Federal Deposit Insurance Corporation (FDIC) taking its $175 billion in deposits and announcing the closure of the bank, promising to insure and repay all depositors by Monday.
Why It’s News
The collapse of SVP has created the most intense 48 hours of this year for the banking industry, as every significant banking organization is seeing losses from the fallout of this one small bank. As Big Short investor Michael Burry tweeted on Thursday, “It is possible today we found our Enron.” He subsequently deleted the tweet.
Thursday’s venture capitalist bank run was caused by two factors—the tightening of monetary policy by the Federal Reserve and high inflation. As Business Insider notes, high-interest rates made access to funds more difficult for startups, and a high volume of outflows put more pressure on the bank. SVB’s bond holdings suffered due to the Fed’s policies, and a bank run caused the bank to panic, facing a liquidity crisis, and push a firesale of $21 billion worth of its fixed-income portfolio.
This has left Silicon Valley startups in a vulnerable position as they struggle to assess their position and ability to pay bills, further compounding economic pressures that resulted in mass tech layoffs earlier this year. Many venture capital investors are rushing to disclose their exposure to SVB, CNN reports.
The collapse comes just four months after the collapse of FTX, one of the world’s largest cryptocurrency exchanges, which faced a liquidity crunch that destroyed the firm and tanked the crypto economy for two months as billions of dollars in user funds were lost.
It remains to be seen how SVP’s collapse will affect the rest of the financial system. Still, the early indicators suggest that its collapse could have a significant effect on the rest of the economy. “The failure of SVB Financial could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash,” tweeted billionaire investor Bill Ackman. “If private capital can’t provide a solution, a highly dilutive gov’t preferred bailout should be considered.”
