US regulators closed Silicon Valley Bank (SVB) this Friday and took control of its clients’ deposits in one of the biggest falls of a bank in that country since 2008.
The decision was made by California authorities after the company, a key technology lender, failed to raise enough funds to cover a loss from the sale of assets hit by high interest rates.
Its problems led customers to try to withdraw their funds and raised fears about the banking sector in general.
Officials said they closed the bank to “protect insured depositors”.
The Federal Deposit Insurance Corporation (FDIC), which protects deposits of up to US$250,000, reported that it took over the funds.
Clients with insured deposits will have access to their money “no later than Monday morning,” the state entity said, adding that the money raised from the sale of the bank’s assets will go to uninsured depositors.
The episode came after SVB announced that it was trying to raise US$2.25 billion to cover its losses.
The news caused investors to flee the bank. Shares experienced their biggest single-day drop on Thursday, plunging more than 60% and falling further in after-hours trading.
maximum uncertainty
Concerns that other banks could face similar problems led to widespread selling of bank shares globally on Thursday and early Friday.
SVB did not immediately respond to a BBC request for comment.
A crucial lender for early-stage businesses, known as start upSVB was the banking partner of nearly half of the US firm-backed healthcare and technology companies listed on the stock markets last year.
Speaking from Washington on Friday, US Treasury Secretary Janet Yellen said she is monitoring “recent developments” at the SVB and other banks “very carefully.”
“When banks experience financial losses it is and should be cause for concern,” he said.
Investors also had to deal with the recent drop in Silvergate Capitala lender focused on the cryptocurrency market, whose shares lost 22% after it said late on Thursday that it planned to scale back operations.
This bank was in trouble after it was hit by losses following the collapse of FTX.
While many Wall Street analysts have argued that the SVB crisis is unlikely to spill over into the broader banking system, shares of other midsize and regional banks were reeling on Friday amid uncertainty.
4 keys to understanding collapse
- The bank’s losses are explained in the context of the Federal Reserve’s relentless rise in borrowing costs over the past year. Many firms in the technology sector, its main clients, have preferred not to borrow to avoid exposing themselves to risks.
- On the other hand, the large investors who usually allocate funds to start-ups are not interested in taking risks either.
- In the midst of this scenario, the bank was losing liquidity being affected by the decrease in deposits from its clients.
- When it became known that the bank was on a tightrope and needed to refinance, customers began withdrawing their funds for fear of losing them. Panic began to spread until on Thursday the entity’s shares plummeted more than 60%.
Finally, on Friday, SVB’s trading on Wall Street was suspended and, a few hours later, regulators announced its closure.
The firm, which started as a California bank in 1983, employed more than 8,500 people worldwide, though most of its operations were in the United States.
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