• Fri. Mar 1st, 2024

How the second-largest bank failure in U.S. history occurred within 48 hours

Mar 11, 2023

Silicon Valley Bank was a well-capitalized organization seeking to raise funds on Wednesday.

Within 48 hours, the venture capital community that SVB had served and fostered precipitated a panic that destroyed the bank’s 40-year tenure.

Friday, regulators closed SVB and confiscated its accounts in the second-biggest bank failure in U.S. history and the largest since the 2008 financial crisis. The company’s downhill spiral began late Wednesday when it informed investors that it needed to raise $2.25 billion to strengthen its balance sheet. Following this, a highly regarded bank that had risen alongside its technological clientele quickly failed.

Even now, as the dust begins to settle on the second bank closure reported this week, members of the venture capital industry mourn the role that other investors played in SVB’s demise.

“This was a bank run caused by venture capitalists,” Ryan Falvey, a fintech investor at Restive Ventures, told CNBC. This will go down in history as one of the most extreme examples of an industry chopping off its nose to spite its face.

The incident is the most recent consequence of the Federal Reserve’s efforts to combat inflation with the most aggressive rate-hiking campaign in four decades. Concerns exist that companies may be unable to pay their staff in the following days, that venture capitalists may struggle to secure funding, and that an already beleaguered industry may experience a deeper depression.

The fall of SVB has its origins in the dislocations caused by rising interest rates. SVB ran out of funds as startup clients withdrew deposits to keep their businesses afloat in a frigid environment for IPOs and private fundraising. The bank announced late Wednesday that it had been forced to sell all of its available-for-sale bonds at a loss of $1.8 billion.

The unexpected need for fresh funding, which followed the collapse of the crypto-focused Silvergate bank, prompted another wave of deposit withdrawals on Thursday, as venture capitalists urged their portfolio companies to relocate funds, according to sources familiar with the situation. The issue is that a bank run at SVB might pose an existential risk to companies unable to access their deposits.

On a call that began Thursday afternoon, SVB customers reported that CEO Greg Becker did not inspire confidence when he advised them to “be calm.” The stock’s continuous decline reached 60 percent by the end of regular trading. Importantly, Becker was unable to guarantee that the capital raise would be the bank’s last, according to a call participant.

Killing blow
Customers withdrew a stunning $42 billion in deposits by the end of Thursday, according to a report with the California Department of Financial Institutions.

The regulator stated that by the end of business that day, SVB had a negative cash position of $958 million and was unable to secure sufficient collateral from other sources.

Falvey, a former employee of SVB who launched his own fund in 2018, cited the highly interconnected nature of the tech investing community as a primary cause for the bank’s sudden demise.

In recent days, prominent firms such as Union Square Ventures and Coatue Management sent emails to their entire rosters of startups, asking them to withdraw funds from SVB due to fears of a bank run. He added that social media merely exacerbated the hysteria.

Falvey stated, “When you say, ‘Get your deposits out, this thing is going to fail,’ it’s like shouting fire in a full theater. This is an example of a self-fulfilling prophesy.

Spencer Greene, a partner at TSVC, blasted investors who were “incorrect on the facts” regarding SVB’s position.

Greene stated, “It appears there was no liquidity issue until a few VCs brought it up.” “Their irresponsibility resulted in its own fulfillment.”

“Everything as usual”
Some SVB customers received emails on Thursday evening informing them that the bank was operating normally.

According to a copy of the message acquired by CNBC, an SVB banker wrote to a client, “I’m sure you’ve heard some talk about SVB in the markets today, so I wanted to contact out and provide some background.”

The banker wrote, “All is normal at SVB.” “It is understandable that you may have questions, and I am available to address them.”

As SVB shares continued to decline on Friday, the bank abandoned efforts to sell them, according to CNBC’s David Faber. Instead, it was reportedly seeking a buyer. But, the flight of deposits made the sale process more difficult, and this effort also failed, according to Faber.

Falvey, who began his career at Wells Fargo and advised for a bank that was seized during the financial crisis, expressed optimism after analyzing SVB’s mid-quarter statement on Wednesday. He stated that the bank was adequately financed and could reimburse all depositors. As rumors circulated, he advised his portfolio businesses to keep their funds at SVB.

Those who remained with SVB after the bank run that resulted in its seizure now face an uncertain timescale for reclaiming their funds. The majority of deposits held by SVB were uninsured, and it is unknown when they will become accessible.

“The sudden withdrawal of deposits has rendered the Bank unable to meet its commitments when they mature,” the California banking regulator stated. The bank is currently insolvent.