The Federal Deposit Insurance Corporation said on Friday that it would take over Silicon Valley Bank, a 40-year-old institution based in Santa Clara, Calif. The bank’s failure is the second-largest in U.S. history, and the largest since the financial crisis of 2008.
Silicon Valley Bank, Santa Clara, California, was closed today by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB). At the time of closing, the FDIC as receiver immediately transferred to the DINB all insured deposits of Silicon Valley Bank.
All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. 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.
Silicon Valley Bank had 17 branches in California and Massachusetts. 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. Under the Federal Deposit Insurance Act, the FDIC may create a DINB to ensure that customers have continued access to their insured funds.
As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.
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Silicon Valley Bank’s journey in barely 36 hours from the center of the startup ecosystem to a potentially existential threat to it has left a lot of questions.
What happens next to the failed Silicon Valley Bank?
The FDIC created the Deposit Insurance National Bank of Santa Clara (DINB) as receiver. The bank’s branches were closed today but will reopen Monday. Deposits are frozen in the meantime. The FDIC generally seeks an existing bank to take over the operations of a failed bank.
Discussions to that end are reportedly underway today, though SVB’s size — it was the nation’s 18th largest bank — and its unusual business model of taking stakes in startups as well as providing lending and other banking services to them — could complicate this effort.
“This will likely be similar to the failure of IndyMac Bank in 2008,” said Joseph Lynyak, an expert on bank failures and regulation in his role as a partner at the international law firm Dorsey & Whitney. “The FDIC closed that bank but had not already lined up an assuming bank.”
In that case, Steve Mnuchin created OneWest Bank as the successor bank. (Mnuchin was later Treasury Secretary in the Trump Administration.)
“The FDIC is likely negotiating a similar arrangement as we speak, with the result that virtually all assets and liabilities of Silicon Valley Bank will be transferred to the assuming bank in a short period of time,” Lynyak said.
“The FDIC has the ability not to transfer specified assets and liabilities, which stay in the receivership and must go through the receivership process. In the next few weeks, we will have to closely watch for an FDIC announcement regarding the ’cause’ of the bank failure, which will inform the decisions regarding what assets and liabilities may not be transferred to an assuming bank,” Lynyak said.
What does Silicon Valley Bank’s failure mean for depositors?
Those with deposits up to $250,000 are fully covered by FDIC insurance. That’s likely to be cold comfort for many SVB customers, though.
Given the institution’s role as the primary banker for the startup world and venture industry, many customers likely had a lot more than $250,000 on deposit with it. Those larger customers with uninsured deposits will have to wait to find out how much and when, if ever, their funds will be restored. A lot will depend on whether and how quickly the FDIC will be able to sell SVB’s assets or find another bank to take over SVB’s operations.
In the meantime, such customers will get “receivership certificates” for amounts they had on deposit that were in excess of $250,000.
What impact is Silicon Valley Bank’s failure having on startups?
Silicon Valley Bank’s collapse Friday sent shock waves through the Bay Area’s startup world. Some that banked with SVB were faced with the immediate problem of meeting next week’s payroll.
“It’s not good news,” said Ryan Gilbert, founder of Launchpad Capital. “The first knock-on effect is the lack of clarity about what happens next.”
Looking beyond meeting next week’s payroll, Silicon Valley Bank’s failure is expected to have long-term ramifications.
“This is an extinction level event for startups and will set startups and innovation back by 10 years or more,” Garry Tan, president and CEO of Y Combinator, tweeted Friday. “All little startups, tomorrow’s Googles and Facebooks, will be extinguished if we don’t find a fix.”
“It might mean thousands of startups die before the FDIC gets through its receivership process and releases the funds,” Tan said in another tweet. “The most important thing the FDIC and the US government can do right now is make the receivership as short as possible.”
What caused Silicon Valley Bank’s sudden failure?
The bank experienced a run on deposits in recent weeks that accelerated Thursday after SVB announced late Wednesday it was seeking to raise $2.25 billion. That spooked investors, causing the bank’s shares to plunge more than 60% Thursday. Some in Bay Area finance circles wondered Friday why the company hadn’t raised the capital before announcing it lost $1.8 billion on the sale of a $21 billion securities portfolio.
Why is pressure mounting on federal banking regulators?
The impact of Silicon Valley Bank’s failure could have widespread implications if the economic fallout spreads quickly. Startups without access to their cash at SVB could start laying off staff and possibly shutting down altogether. Plus, large depositors at other banks could begin to question the safety and soundness of their own financial institutions. Avoiding that type of bank-run contagion is why the FDIC was established in 1933.
“Where is (Fed Chairman Jerome) Powell? Where is (Treasury Secretary Janet) Yellen? Stop this crisis NOW. Announce that all depositors will be safe. Place SVB with a top 4 bank. Do this before Monday open or there will be contagion and the crisis will spread,” venture capitalist David Sacks said in a tweet. He said in another Twitter post: “Anybody who thinks that preventing bank runs and panics isn’t a federal responsibility missed a couple hundred years of financial history. It’s called systemic risk, and only federal banking authorities can stop it.”
Thiel’s Founders Fund Withdrew Millions From Silicon Valley Bank
Peter Thiel’s Founders Fund had no money with Silicon Valley Bank as of Thursday morning as the bank descended into chaos, according to a person familiar with the matter.
Founders Fund withdrew millions from SVB, said the person, who asked not to be identified discussing private information. It joined other venture funds that took dramatic steps to limit exposure to the now-failed financial institution. Founders Fund also advised its portfolio companies that there was no downside to moving their money away from SVB, even if the risk was low.
Founders Fund acted in other ways to move its business away from SVB. On Thursday, as the bank was beginning to unravel, the firm started what’s known as a capital call. That’s a run-of-the-mill activity in the venture capital world, in which a VC firm asks its investors, or limited partners, to send it money in order to make investments in startups — the core function of most VC firms. It began by asking those backers to transfer the funds to accounts at SVB, as it has done for years, the person said.
But the firm learned that its limited partners were encountering issues using SVB services as they tried to transfer the funds — they weren’t immediately going through as expected, the person said.
Quickly, Founders Fund asked its investors to transfer the money to other banks instead. The fund acted to ensure that startup funding deals that were slated to close in the coming days were not delayed, the person said.
Today, Founders Fund has no exposure to SVB. The person did not say if the firm’s cash withdrawals happened on Thursday, as the startup world was panicking about SVB’s financial position, or earlier.
Founders Fund went further than many other venture firms, which kept some money with Silicon Valley Bank in order to maintain a relationship with the institution. This week, as panic turned into a bank run, some venture firms suggested that the tech industry had a moral imperative not to abandon SVB.
SVB Collapse: Roku, Rocket Lab, Roblox Affected
Streaming company Roku (ROKU) – Get Free Report, disclosed on Friday that it has 26% of its total cash and cash equivalents at Silicon Valley Bank which was shut down by the FDIC.
Roku said it had $487 million of cash out of a total of s $1.9 billion in uninsured deposits at SVB which was placed into federal receivership on Friday, according to a SEC filing.
The FDIC only insures up to $250,000 of deposits. Additional deposits are considered uninsured. Shares of Roku fell by 3.65% in electronic trading. Roku said it was unknown how much of its cash would be accessible.
Space company Rocket Lab USA (RKLB) – Get Free Report said in a SEC filing that it had $38 million in cash or 7.9% of its cash as of Dec. 31 with SVB. The company made no other comments in the filing and did not address where the remainder of its cash was being held. Shares of Rocket Lab fell 2.3% in after hours trading.
Roblox (RBLX) – a gaming platform company, saw its shares dip only slightly by 0.62% in after hours trading.
Video platform company Vimeo (VMEO) – said its account balance was under the $250,000 threshold.
Sports streaming company Fubo (FUBO) – said it “does not hold any deposits at SVB or have any other direct investments at SVB.”
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