Silicon Valley Bank seized by FDIC as depositors pull cash

The bank failed after depositors – mostly technology workers and venture capital-backed companies – created a run on it.

The Federal Deposit Insurance Corporation seized the assets of Silicon Valley Bank on Friday, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis.

The bank failed after depositors, mostly technology workers and venture capital-backed companies, began withdrawing their money – creating a run on the bank.

Silicon Valley was heavily exposed to the tech industry and there is little chance of contagion in the banking sector as there was in the months leading up to the Great Recession more than a decade ago. Major banks have sufficient capital to avoid a similar situation.

The FDIC ordered the closure of Silicon Valley Bank and immediately took possession of all deposits at the bank Friday. The bank had $209bn in assets and $175.4bn in deposits as the time of failure, the FDIC said in a statement. It was unclear how much of deposits was above the $250,000 insurance limit at the moment.

Notably, the FDIC did not announce a buyer of Silicon Valley’s assets, which is typically when there is an orderly wind-down of a bank. The FDIC also seized the bank’s assets in the middle of the business day, a sign of how dire the situation had become.

The financial health of Silicon Valley Bank was increasingly in question this week after the bank announced plans to raise up to $1.75bn in order to strengthen its capital position amid concerns about higher interest rates and the economy. Shares of SVB Financial Group, the parent company of Silicon Valley Bank, had plummeted nearly 70 percent before trading was halted before the opening bell on the Nasdaq.

CNBC reported that attempts to raise capital failed and the bank was now looking to sell itself.

Bruising week

As the 16th-largest bank in the country, Silicon Valley bank is not small. It acts as a major financial conduit for venture capital-backed (VC-backed) companies, which have been hit hard in the past 18 months as the Federal Reserve has raised interest rates and made riskier tech assets less attractive to investors.

VC-backed companies were being reportedly advised to pull at least two months’ worth of “burn” cash out of Silicon Valley Bank to cover their expenses. Typically, VC-backed companies are not profitable and how quickly they use the cash they need to run their businesses — their so-called “burn rate” — is a typically important metric for investors.

Shares of diversified banks like Bank of America and JPMorgan pulled out of an early slump due to data released Friday by the Department of Labor that showed wage gains slowed in February. But regional banks, particularly those with heavy exposure to the tech industry, were in decline.

Regardless, it has been a bruising week. Shares of major banks are down this week between 7 percent and 12 percent.

Secretary of the Treasury Janet Yellen told legislators on Capitol Hill Friday the department was aware of recent developments and was monitoring the situation, calling it “a matter of concern” when banks experience losses, according to CNBC.

US regulators were observed arriving at the bank’s California offices on Friday, Bloomberg News reported.