Silicon Valley Bank

Tech start-up-focused Silicon Valley Bank (SVB) just become the largest US financial institution to fail in nearly 15 years. California’s Department of Financial Protection and Innovation (DFPI) stepped in to seize the bank, which had a number of high-profile crypto clients, on Friday.

SVB’s abrupt implosion follows an unsuccessful attempt by the bank to raise capital earlier in the week in order to reassure deposits and shore up its balance sheet, and marks the second major US bank shutdown this week. Earlier this week, crypto-friendly Silvergate Bank went into voluntary liquidation, after experiencing a bank run over the course of the last few months.

In a statement, the DFPI said it took over the bank due to “inadequate liquidity and insolvency”, with the Federal Deposit Insurance Corporation (FDIC) now to take receivership of the bank.

According to the DFPI, SVB’s assets at the time of seizure are around $209 billion, while its total deposits are around $175.4 billion. That means SVB is the second largest financial institution to collapse in US history, second only to Washington Mutual Bank’s downfall in 2008.

The FDIC said that “all insured depositors will have full access to their insured deposits no later than Monday morning”. Once valued at $40 billion, SVB’s collapse marks a stunning evaporation of investor wealth.

The collapse of Silvergate and SVB this week has sent shivers across Wall Street and crypto markets. The S&P 500 has now more or less given back all of this year’s gains after dropping 4.5% this week, its worst weekly performance since last September.

Bitcoin and Ether, meanwhile, are down 11% and 10% respectively.

How Did Things Go So Horribly Wrong?

SVB’s stock price collapsed 60% on Thursday after the bank announced that it would be trying to raise over $2 billion via new debt and equity issuance amid massive losses on its bond portfolio.

Things went from bad to worse for the bank as major venture capital firms, including Peter Thiel’s Founders Fund advised portfolio companies to pull cash from the bank. The subsequent rush to pull deposits ultimately led to the bank’s downfall.

According to Cornell University law professor Saule Omarova as quoted in an article by Bloomberg, “bank runs are a lot about psychology… and at this point, it’s very rational to be nervous”.

“The FDIC receivership will end the uncertainty about this particular bank… But I don’t think that necessarily itself stops people from feeling less safe if they have some kind of exposure to assets or they hold their own money in banks with similar risk profiles,” he added.

New York-based crypto-friendly bank Signature Bank saw its share price crater over 20% on Friday, taking losses on the week to nearly 40%. Meanwhile, West Coast-based First Republic Bank shed around 15% and Western Alliance Bancorporation dropped 20%.

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