New York (CNN) This week, the go-to bank for U.S. tech startups quickly unraveled, leaving its powerful clients and investors in limbo.
Silicon Valley Bank, facing a sudden bank run and capital crisis, collapsed Friday morning and was taken over by federal regulators.
It is the biggest failure of a US bank since Washington Mutual in 2008.
Here’s what we know about the bank’s downfall and what could come next.
What is SVB?
Founded in 1983, SVB specializes in banking for technology startups. It has provided funding to nearly half of America’s venture-backed tech and healthcare companies.
Although relatively unknown outside of Silicon Valley, SVB was among the top 20 U.S. commercial banks, with $209 billion in total assets at the end of last year, according to the FDIC.
Why did he fail?
In short, SVB met a classic run on the bank.
The long version is a bit more complicated.
Several forces collided to take down the banker.
First, there was the Federal Reserve, which started raising interest rates a year ago to keep inflation under control. The Fed acted aggressively and rising borrowing costs undermined the momentum in tech stocks that had benefited SVB.
Rising interest rates also eroded the value of long-term bonds, which the SVB and other banks gobbled up at the time of extremely low interest rates, close to zero. SVB’s $21 billion bond portfolio was yielding an average of 1.79% – the current 10-year Treasury yield is around 3.9%.
At the same time, venture capital began to dry up, forcing startups to dip into funds held by the SVB. The bank therefore sat on a mountain of unrealized bond losses just as the pace of customer withdrawals accelerated.
Panic sets in…
On Wednesday, SVB announced that it had sold a bunch of securities at a loss and would also sell $2.25 billion in new shares to shore up its balance sheet. This sparked a panic among major venture capitalists, who reportedly advised companies to pull their money out of the bank.
Shares of the bank began to fall on Thursday morning and by afternoon dragged other bank stocks down with them as investors began to fear a repeat of the 2007-08 financial crisis.
On Friday morning, trading in SVB shares was halted and it abandoned efforts to quickly raise capital or find a buyer. California regulators stepped in, closing the bank and placing it in receivership under the Federal Deposit Insurance Corporation.
Fears of contagion ease
Despite the initial panic on Wall Street, analysts said SVB’s collapse is unlikely to trigger the kind of domino effect that gripped the banking industry during the financial crisis.
“The system is as well capitalized and liquid as it has ever been,” said Moody’s chief economist Mark Zandi. “The banks that are currently in trouble are far too small to pose a significant threat to the whole system.”
By Monday morning, all insured depositors will have full access to their insured deposits, according to the FDIC. It will pay uninsured depositors an “early dividend over the next week”.
So while a broader contagion is unlikely, smaller banks that are disproportionately tied to cash-strapped industries like tech and crypto could take a beating, according to Ed Moya, senior market analyst at Oanda.
“Everyone on Wall Street knew the Fed’s rate hike campaign would eventually break something, and right now it’s destroying smaller banks,” Moya said on Friday.
The FDIC typically sells the assets of a failing bank to other banks, using the proceeds to reimburse depositors whose funds were uninsured.
A buyer could yet emerge for SVB, although that is far from guaranteed.