See what the 2nd biggest failure of an American bank since the 2008 crisis can teach

The 48-hour collapse of Silicon Valley Bank (SVB) led to the second-largest financial institution failure in US history.

SVB was one of the top 20 commercial banks in the United States and is now under the control of the US Federal Deposit Insurance Corporation (FDIC) after it became unable to pay customers who withdrew their deposits.

While experts have allayed fears of wider contagion, the bank’s collapse could have significant ramifications for the startup and tech sectors.

SVB was a giant bank

Founded in 1983, Silicon Valley Bank has provided funding for nearly half of venture capital-backed American technology and healthcare companies – they have been hurt by higher interest rates and dwindling venture capital.

Though relatively unknown outside of Silicon Valley, SVB was among the top 20 largest US commercial banks with $209 billion in total assets at the end of last year, according to the FDIC.

Its impressive and seemingly quick fall is the biggest shutdown of a US bank since Washington Mutual in 2008.

FDIC fast action

The wheels began to fall on Wednesday (8), when the SVB announced that it had sold securities at a loss and that it would sell US$ 2.25 billion (about R$ 10 billion) in new shares to reinforce its balance sheet.

California regulators closed the technology lender on Friday (10). The FDIC is acting as a receiver, which typically means it will liquidate the bank’s assets to pay its customers, including depositors and creditors.

The FDIC, an independent government agency that insures bank deposits and oversees financial institutions, said all insured depositors will have full access to their insured deposits by Monday morning.

The agency said it would pay uninsured depositors an “early dividend next week.”

The FDIC took over the bank mid-morning on Friday – it usually waits until markets close.

“The SVB’s condition deteriorated so quickly that it couldn’t last just another five hours,” wrote Better Markets CEO Dennis M. Kelleher.

“That’s because their depositors were withdrawing their money so fast that the bank was insolvent, and an intraday closure was inevitable due to a classic bank run.”

High interest rates led to the end

To combat runaway inflation, the central bank has been aggressively raising interest rates since 2022. This has made borrowing for businesses and individuals more expensive to cool the economy.

When interest rates were close to historic lows, banks bought long-term, seemingly low-risk Treasuries. But as rates rose, the value of those assets plummeted, leaving them with unrealized losses.

The high fees have significantly constrained tech companies, which have driven down the value of tech stocks and made it difficult to raise capital.

Faced with these higher interest rates, loss of IPOs and funding shortages, SVB customers began to withdraw money from the bank.

“The higher rates also reduced the value of its treasury and other securities that the SVB needed to pay depositors,” said Moody’s Chief Economist Mark Zandi.

“All of this triggered the run on deposits that forced the FDIC to acquire SVB.”

It’s not a banking crisis yet

On Thursday, billionaire hedge fund manager Bill Ackman compared SVB to Bear Stearns, the first creditor to collapse at the start of the 2007-2008 global financial crisis.

“The risk of bankruptcy and deposit losses here is that the next least capitalized bank has a run and fails, and the dominoes keep falling,” Ackman wrote on Twitter.

But most analysts say the SVB implosion seems company-specific for now, wrote Julia Horowitz and Anna Cooban.

Banks and lenders with specialized clientele, as well as the SVB, will feel the brunt of the fallout.

“The reason why [o SVB está] with problems is because they have exposure to specific sectors,” said Jonas Goltermann, deputy chief markets economist at Capital Economics. Most other banks, he added, are more “diversified”.

There is also less anxiety about the stability of the banking sector due to the important regulatory reforms implemented after the 2008 crisis.

Ordinary consumers, in general, are unlikely to be affected. But the breakdown is a good reminder to be aware of where your money is kept and not to have it all in one place.

“The first bank failure since 2020 is a wake-up call for people to always make sure their money is in an FDIC insured bank and within FDIC limits and following FDIC rules,” said Matthew Goldberg, an analyst at Bankrate.

Tech companies are struggling

SVB was one of the main creditors of the startup community, whose founders now worry about withdrawing their money, paying payroll and covering operating expenses, wrote Catherine Thorbecke.

“Now that the bank has failed, I just want to know what happens next,” Ashley Tyrner, founder of health food delivery company FarmboxRx, told CNN in an email.

“The FDIC covers 250k, but will I get all my 8 figures back?”

Some are getting creative. Children’s toys, apparel and experiences retailer CAMP emailed customers on Friday and announced it on its website.

“Unfortunately, we had most of our company’s cash assets in a bank that just failed. I’m sure you’ve heard the news. He asked customers to use code BANKRUN to save 40% on all merchandise (or pay full price – which would be appreciated).

Creditors are feeling the pain

Lenders somewhat similar to SVB are in an unfortunate situation.

Crypto-focused lender Silvergate has said it is winding down operations and will liquidate the bank after taking a financial hit from the turmoil in digital assets.

“In light of recent industry and regulatory developments, Silvergate believes that an orderly closure of the Bank’s operations and a voluntary liquidation of the Bank is the best way forward,” it said in a statement on Wednesday.

But the risks of wider contagion are believed to be limited for now.

“Overall, the banking system is in good shape and able to withstand significant shocks,” said Jens Hagendorff, professor of finance at King’s College London.

“I think SVB is special in the sense that they have an ever-changing depositor base.”

Stocks plunged on Friday

The Dow dropped 345 points, or 1.1% on Friday. The S&P 500 was down 1.5% and the Nasdaq Composite was down 1.8%.

For the week, the Dow fell 4.4%, its worst week since June. The S&P 500 is down 4.6% and the Nasdaq is down 4.7%.

Wall Street’s fear gauge, the VIX, jumped 15% on Friday afternoon as investors rushed to safe havens to avoid any contagion from the banking sector, the markets team said.