How Silicon Valley Bank collapsed

Silicon Valley Bank, a ley lender for the tech and venture capital sectors and America’s 16th-largest bank by balance sheet size, was seized by federal regulators on Friday in the largest institutional failure since the 2008 financial crisis. Investors are still scratching their heads over what happened at the bank, as the entire collapse occurred quite literally overnight. On Thursday morning, the bank had a market cap of more than $15 billion and by Friday, its $209 billion in assets and $175 billion in deposits made it the second-largest bank failure in U.S. history, according to the FDIC

The collapse has sparked widespread panic in the tech investor and startup world, with many of the silicon valley-based depositors still trying to understand their exposure and how they might be able to get their money back. Scarily, at the center of it all is the same dynamic that caused institutional failures among traditional banks in 2008 and among numerous cryptocurrency exchanges in last year’s “crypto winter”: a bank run. As concerns about the lender’s solvency mounted earlier this week, a wave of attempted withdrawals turned into a tsunami, sending the bank’s value spiraling out of control.  

The rollercoaster began on Wednesday, when a series of announcements by SVB rattled investors. The bank suddenly disclosed that it had sold $21 billion of investments, resulting in an after-tax loss of $1.8 billion for the quarter, and that it was conducting a stock sale worth $2.25 billion in an attempt to shore up its finances. In a letter to stakeholders by CEO Greg Becker, the bank also revealed it was taking out loans to borrow $15 billion more than originally planned.

In the letter, SVB mentioned rising interest rates, increased instances of cash burn among tech companies, and other market pressures amid a negative economic environment. The Fed has raised interest rates eight times in the past year, with more hikes on the horizon, and the tightening campaign has devalued the bonds that the bank normally invests in to make its strategy of lending to mostly Silicon Valley-based startups viable. But the end of the Fed’s “easy money” era has been bad for tech startups and for the bonds held by this particular startup-focused bank. The center suddenly wasn’t holding.

Becker’s letter said the borrowing rounds would help offset the losses from its bond sales, and insisted the bank remained solvent, saying it was “well-capitalized, with a high quality, liquid balance sheet and peer-leading capital ratios.”

Investors didn’t buy it.

Soon after SVB’s disclosures, clients and investors began pulling their deposits and assets out of the bank as fast as they could, with an equivalent impact on its stock price: It fell 60% in Thursday trading, then another 20% in after-market trading, heading for a wipeout by the open of markets on Friday. The tech sector has been uncharacteristically nervous for months, as a negative market environment has hit tech companies hardest, leading to large stock devaluations and widespread cost-cutting measures. Many investors were also on edge after another Californian bank, the popular lender to crypto startups, Silvergate, collapsed on Wednesday, the latest of several crypto industry failures over the past year.

Becker attempted to stem the tide on Thursday during a call where he reportedly urged investors to “stay calm and to support us like we’ve supported you during the challenging times,” while continuing to insist the bank was solvent.

But the damage had already been done. News of the bank’s perceived troubles had already spread like wildfire on social media, amplifying fear and aggravating the sell-off. Bigger names got involved as Thursday wore on, advising companies to reduce their exposure to SVB as much as they could. Founders Fund, the VC fund started by PayPal co-founder Peter Thiel, advised portfolio companies to remove their money and assets from the bank, citing concerns over its financial stability, Bloomberg reported Thursday evening.

Investors were still sure SVB could survive given its importance to the industry and the tech economy in general. “SVB is not going to go down,” one VC investor told Fortune Thursday, referencing the 2008 belief that some banks are too ingrained to collapse: “It can’t—it’s like, too big to fail.” Even financial advisers have recently considered SVB to be a savvy investment, including CNBC’s Jim Cramer who just last month placed the bank’s parent company as one of his top 10 stocks to buy on the S&P 500.

But by late on Thursday, almost no one was still pretending SVB was solvent. Billionaire hedge fund investor Bill Ackman wrote Thursday evening that the government should consider stepping in to bail SVB out. By Friday morning, SVB’s parent company was reported to be seeking a fire sale of the bank after failing to find any last-minute capital to prop it up, as first reported by CNBC. But withdrawals and sell-offs continued at a blistering pace, and with no interested buyer coming forward, the bank and its assets were finally seized by the FDIC.

There are very few certainties for what comes next. The FDIC said on Friday that deposits in SVB lower than the regulatory body’s $250,000 insurable limit will be available for withdrawal on Monday. Clients with deposits higher than the insurable limit will have to wait and see what the bank’s assets are eventually sold for, to determine how much they can get back. The FDIC has handed out certificates that will allow clients to be the first ones to get any compensation, although it is unclear when this will happen and how many funds will be available. 

The hunt is still on for a buyer, and the goal is to strike a deal for either all the bank’s assets or only some of them by Monday, Bloomberg reported after the seizure. Analysts with JPMorgan said Friday that SVB remained a “world class” firm and that its current share price was a “highly attractive valuation.”

An immediate concern is whether SVB’s collapse will have a knock-on effect on other banks. Many U.S. banks, especially smaller ones, are facing similar issues as SVB as interest rates continue to rise, and while no other banks have raised concerns over their solvency just yet, some small and regional ones including First Republic and PacWest Bancorp have seen their stock slide significantly in the past 24 hours as the SVB debacle prompted sell-offs at other banks since Thursday.

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