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The FDIC seized the assets of Silicon Valley Bank Friday morning, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis.
The bank, which has a major presence in Massachusetts after buying Boston Private Bank in 2021, 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 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, experts say. Major banks have sufficient capital to avoid a similar situation.
The country’s last bank failure happened when Almena State Bank was closed by federal regulators in October 2020.
Notably, the FDIC did not announce a buyer of Silicon Valley’s assets, which is typically when there’s 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 $1.75 billion 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 those attempts to raise capital failed and the bank had been looking to sell itself.
Silicon Valley bank was the 16th largest bank in the country. It acts as a major financial conduit for venture capital-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.
Venture capital-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.
Diversified banks like Bank of America and JPMorgan pulled out of an early slump due to data released Friday by the Labor Department, but regional banks, particularly those with heavy exposure to the tech industry, were in decline.
Yet it has been a bruising week. Shares of major banks are down this week between 7 percent and 12 percent.
Friday’s struggles come amid what strategists in a BofA Global Research report called “the crashy vibes of March.” Markets have been twitchy recently on worries that high inflation is proving difficult to drive down, which could force the Federal Reserve to reaccelerate its hikes to interest rates.
Such hikes can undercut inflation by slowing the economy, but they also drag down prices for stocks and other investments and raise the risk of a recession later on.
“There are starting to be cracks that are appearing,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth. “SVB is a warning for the Fed that their actions are beginning to have an impact.”
AP staff writer Stan Choe contributed to this report.
