Tech Bank Fails, Rattles Markets --- Startup-focused lender Silicon Valley is taken over by FDIC, dragging down financial stocks

"SANTA CLARA, Calif. -- Silicon Valley Bank collapsed Friday in the second-biggest bank failure in U.S. history after a run on deposits doomed the tech-focused lender's plans to raise fresh capital.

The Federal Deposit Insurance Corp. said it has taken control of the bank via a new entity it called the Deposit Insurance National Bank of Santa Clara. All the bank's deposits were transferred to the new bank, the regulator said.

Insured depositors will have access to their funds by Monday morning, the FDIC said. Depositors with funds exceeding insurance caps will get receivership certificates for their uninsured balances, meaning businesses with big deposits stuck at the bank are unlikely to get their money out soon.

The bank is the 16th largest in the U.S., with some $209 billion in assets as of Dec. 31, according to the Federal Reserve. It is by far the biggest bank to fail since the near collapse of the financial system in 2008, second only to the crisis-era failure of Washington Mutual Inc.

The bank's parent company, SVB Financial Group, was racing to find a buyer after scrapping a planned $2.25 billion share sale Friday. Regulators weren't willing to wait. The California Department of Financial Protection and Innovation closed the bank Friday within hours and put it under the control of the FDIC.

The bank's troubles have dragged down the industry and unnerved stock investors overall. The blue-chip Dow Jones Industrial Average fell 345.22 points, or 1.1%, to 31909.64. The S&P 500 closed down 56.73 points, or 1.4%, while the Nasdaq Composite lost 199.47 points, or 1.8%.

All S&P 500 sectors closed lower, and the broad-based index had its worst week since September.

Treasury yields tumbled, with the yield on the 2-year note dropping 0.314 percentage point to 4.586%, its largest single-day decline since September 2008.

The bank's collapse dragged down a swath of the industry. The KBW Bank Index fell 16% on the week, its worst weekly performance since March 2020. After investors dumped the shares of banks big and small on Thursday, the megabanks recovered Friday, but many smaller peers continued to plunge. Several were halted for volatility.

Investors are worried about banks with a similar profile to SVB. Shares of San Francisco-based First Republic Bank, which caters to businesses and wealthy individuals, have fallen about 30% since Wednesday. "First Republic's deposit base is strong," the bank said in a statement Friday.

Shares of PacWest Bancorp have fallen 54% in the past two days. More than two-thirds of its lending portfolio is tied to real estate, with a sizable portion lent to venture-capital firms.

SVB catered mainly to the insular ecosystem of startups and the investors that fund them. Its deposits boomed alongside the tech industry, rising 86% in 2021 to $189 billion and peaking at $198 billion a quarter later. The bank poured large amounts of the deposits into U.S. Treasurys and other government-sponsored debt securities.

Tech tumbled after the Federal Reserve began raising rates last year to curb inflation. Startups, as a result, drained their deposits with SVB faster than the bank expected. And new investment stalled, meaning fresh money wasn't coming into the bank.

Rising interest rates, meanwhile, dented the value of SVB's massive bond portfolio. The bank needed fresh capital.

SVB hired Goldman Sachs Group Inc. this week to execute a private stock sale, with plans to announce it upon completion to avoid spooking investors, according to a person familiar with the offering.

Then Moody's Investors Service informed SVB that it planned to downgrade the bank's credit ratings, the person said. As a practice, Moody's informs issuers 24 hours in advance of a credit rating change.

Bankers and SVB executives feared a downgrade would harm the company more than a share sale, the person close to the deal said. They scrambled to bring on private-equity firm General Atlantic to anchor the deal with a $500 million commitment and announced the planned sale after the market closed Wednesday. Moody's downgraded the company later that evening.

SVB shares fell sharply after the market opened Thursday. The violent move in the stock alarmed customers, who began pulling their money out to avoid getting stuck with losses in the event of a failure.

Chief Executive Greg Becker tried to reassure customers on a call Thursday, telling them the bank was on solid footing. It didn't work. 

Venture-capital investors advised startups to pull their money out to avoid losses on deposits in excess of FDIC's $250,000 insurance cap. 

The bank had more than $151 billion worth of deposits that were over the FDIC limit at the end of 2022.

Rival banks were flooded with calls from potential customers looking to move their balances.

Alison Greenberg, co-founder of Los Angeles-based maternity care startup Ruth Health, was in a meeting Thursday when she got a frantic email from a seed investor.

"It basically just said 'Things are imploding at SVB, it's urgent that you get your money out,'" Ms. Greenberg said.

Audrey Wu, a Ruth Health co-founder, began making transfers out of the company's account of different denominations, hoping not to trip up any automated systems that would flag the transactions and potentially delay them.

As she prepared to carry out the final transfer, SVB's website crashed and she couldn't log back in, she said.

Some supporters tried to rally support for the bank. Financial-technology investor Restive Ventures said in an email early Friday that it was keeping its money at SVB and encouraging portfolio companies to do the same. 

"Moving corporate treasury under time pressure, on the internet, is a recipe for disaster," the email said.

The share sale was canceled a few hours later. The bank told employees to "work from home today and until further notice," according to a copy of the email viewed by The Wall Street Journal.

Before 9 a.m. on the west coast, regulators had seized the bank.

More than two dozen people, some who identified themselves as customers, descended on the bank's Santa Clara headquarters Friday morning. 

An FDIC press release announcing the bank's closure was taped to a locked door.

"We are in a whole lot of trouble right now," one customer said on a phone call. "We shouldn't have had all our eggs in one basket," he added." [1]

 

 Now is the best moment to tax the surplus profits of Scandinavian banks in Lithuania. If panic withdrawals start, it will be too late.

 

1. Tech Bank Fails, Rattles Markets --- Startup-focused lender Silicon Valley is taken over by FDIC, dragging down financial stocks
Ensign, Rachel Louise; Driebusch, Corrie; Bobrowsky, Meghan.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 11 Mar 2023: A.1.