Silicon Valley Bank Fails, Insured Deposits to Be Protected

Silicon Valley Bank (SBV), a prominent lender to the technology industry, was shut down by federal regulators Friday in one of the largest bank failures in U.S. history, sending shudders throughout the industry.

The collapse came after customers pulled deposits higher than the $250,000 guaranteed by the Federal Deposit Insurance Corp. (FDIC) and SVB shares spiraled downward. It sparked concern that other lenders may have had similar losses, sending down shares of banks and financial companies as SVB maneuvered to avoid collapse.

SVB said it lost almost $2 billion in the sale of U.S. bonds that it bought before the Federal Reserve started raising interest rates a year ago, the New York Times reported. Higher yields have driven down bond prices, which move inversely. It isn’t clear whether other large banks face similar woes in their portfolios.

On Wednesday, SVB announced the stock sale, which was aimed at covering most of about $1.8 billion in losses from the sale of a $21 billion portfolio of U.S. Treasuries. In an investor letter, bank executives said they had sold almost all of the banks' liquid assets.

“Today we took strategic actions to strengthen our financial position – repositioning SVB’s balance sheet to increase asset sensitivity to take advantage of the potential for higher short-term rates, partially lock in funding costs, better protect net interest income (NII) and net interest margin (NIM), and enhance profitability,” the bank said.

“We are confident that these are the right decisions for our profitability and financial flexibility, both now and for the long term," officials said in the letter.

Investors weren’t reassured. SVB shares lost more than half its value in two trading days.

Even as executives at the bank tried to reassure customers on Thursday, venture capital investors told others to yank their funds, according to the Wall Street Journal. That turned into a bank run, which comes when groups of depositors remove their money simultaneously amid concern the lender will use up its cash reserves and lead to a bank failure.

How Did SBV Get Here?

The Fed’s year-long campaign to raise rates has enabled many banks to charge customers more for loans, bolstering profits. SVB’s failure shows the downside of higher rates: Big losses on the sale of Treasuries, where prices have slumped.

Brace for more market volatility: Today’s stronger-than-expected U.S. jobs report and warnings from the Fed about future interest rate increases mean investors have plenty to digest while deciding where to park their funds.