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March 11, 2023 | RIP Silicon Valley Bank: Shut Down by California Regulator, Taken Over by FDIC, Shareholders Bailed In, Insured Depositors to Get their Cash by Monday

On his site, Wolf Richter slices into economic, business, and financial issues, Wall Street shenanigans, complex entanglements, debacles, and opportunities that catch his eye in the US, Canada, Europe, Japan, and China. He lives in San Francisco.

Silicon Valley Bank, a California state-chartered bank that was uniquely exposed to the massive all-encompassing startup bubble during the Free Money era – a bubble that is now imploding spectacularly amid what is called a mass extinction event among startups – was shut down and taken over Friday morning by the California Department of Financial Protection and Innovation (DFPI). In its press release, the regulator cited “inadequate liquidity and insolvency.”

The DFPI appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC announced that it had created the “Deposit Insurance National Bank of Santa Clara (DINB)” and that the FDIC, as receiver, “immediately transferred to the DINB all insured deposits of Silicon Valley Bank” to protect insured depositors. Depositors will have access to their insured deposits on Monday, March 13.

The FDIC, as receiver, said:

  • “The main office and all branches of Silicon Valley Bank will reopen on Monday, March 13, 2023.
  • “The DINB will maintain Silicon Valley Bank’s normal business hours.
  • “Banking activities will resume no later than Monday, March 13, including on-line banking and other services.
  • “Silicon Valley Bank’s official checks will continue to clear.
  • “The FDIC as receiver will retain all the assets from Silicon Valley Bank for later disposition.
  • ‘Loan customers should continue to make their payments as usual.”

Insured depositors: “All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023,” the FDIC said. They will not lose a dime.

Uninsured depositors: “The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors,” the FDIC said and provided a phone number for this folks to call. It looks like they will get at least a portion of their funds.

FDIC is unlikely to lose money, that’s what it looks like from this statement as the available assets, after they’re sold by the FDIC, will be sufficient to pay for all insured deposits, other liabilities, and at least a portion of the uninsured deposits. So it looks like the FDIC will not incur a loss.

Shareholders got bailed in and face a total loss. They’re the ones who are “bailed in” automatically when the FDIC takes over. Other investors may have a partial loss.

Chaos at the end. The fact that the FDIC took over the bank during the day — rather than Friday evening, which is the normal procedure — shows just how fast-moving and chaotic this situation, including a massive run on the bank, had become.

Silicon Valley Bank had 17 branches in California and Massachusetts. As of December 31, it had $209 billion in assets and $175 billion in deposits.

Its difficulties were becoming clear last year as the startup and crypto bubble, to which it is so heavily exposed, were already in full implosion mode.

In July 2022, I wrote an article, The Startup and Venture-Capital Barometer Plunges: Silicon Valley Bank Today v. Dotcom Bust. The bank survived the Dotcom Bust. But this current bust is much bigger because the Free-Money bubble was much bigger, and the amounts were much bigger, and Silicon Valley Bank was much more heavily exposed to it. RIP.

This collapse occurred after the desperate efforts to raise $2.25 billion in new equity capital and billions of dollars in liquidity [which I discussed in detail yesterday] caused its shares to collapse on Thursday during the day, and they continued to collapse after hours, and they continued to collapse before regular trading this morning, until trading was halted – and trading remains halted at the moment.

The collapse of the shares scuttled the capital raise. Which reinforced the lesson: A bank has to raise capital early, not when it is already under apparent stress.

The deposit outflow started early 2022 when startup companies that were burning massive amounts of cash didn’t receive new funding, as the entire bubble around startups, IPOs and SPACs, imploded.

When a startup company with an account at Silicon Valley Bank got $10 million or $100 million or $500 million in new funding, the cash went into the company’s bank account at Silicon Valley Bank, to then get withdrawn and burned off in increments. When VCs pulled back from funding these startups, the cash-inflow into the deposit accounts dried up, while the cash-outflow continued, draining deposits from the bank.

The bank then had to sell assets and borrow money to fund those withdrawals. But turns out, the bonds it could sell to raise the cash had fallen in market value due to the rising yields, and when it sold those $21 billion in bonds, disclosed yesterday, it lost $1.8 billion, and it would have to sell more bonds and lose money to raise the cash to fund the run on its banks, and those losses would eat away its capital, and it would become insolvent.

There were reports recently that VC funds exhorted their portfolio companies to yank out their deposits from the bank while they still could, since those deposits are far larger than the FDIC insurance limits of $250,000. And there were reports that some of the startups were not able to withdraw their funds.

What followed was a proper run on the bank. But since regulators deemed the bank “insolvent” (it burned through its capital and doesn’t have enough assets to cover its liabilities, such as deposits), regulators shut it down, rather than providing short-term liquidity to overcome a mere run on the bank (by itself a liquidity problem).

Silicon Valley Bank is the first FDIC-insured bank to fail since October 2020, when the FDIC took over Almena State Bank, in Almena, Kansas.

This is how a bank collapse is supposed to be handled. The FDIC stepped in early enough before the situation deteriorated so much that the costs for the FDIC would begin to balloon.

Strictly for your amusement.

For your amusement, here is what the shares of SVB Financial, which owns Silicon Valley Bank, might look like if trading resumes, with the share price of around $1, maybe:

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March 11th, 2023

Posted In: Wolf Street

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