Silicon Valley Bank Fails After Run on Deposits

 Silicon Valley Bank Fails After Run on Deposits

The Federal Deposit Insurance Corporation took control of the bank’s assets on Friday. The failure raised concerns that other banks could face problems, too.

Silicon Valley Bank’s headquarters in Santa Clara, Calif., on Friday. Founded in 1983, Silicon Valley Bank was a big lender to tech start-ups.

By Emily Flitter and Rob Copeland

Emily Flitter and Rob Copeland cover Wall Street and finance.

March 10, 2023

Updated 9:42 p.m. ET

One of the most prominent lenders in the world of technology start-ups, struggling under the weight of ill-fated decisions and panicked customers, collapsed on Friday, forcing the federal government to step in.

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.

The move put nearly $175 billion in customer deposits under the regulator’s control. While the swift downfall of the nation’s 16th largest bank evoked memories of the global financial panic of a decade and a half ago, it did not immediately touch off fears of widespread destruction in the financial industry or the global economy.

Silicon Valley Bank’s failure came two days after its emergency moves to handle withdrawal requests and a precipitous decline in the value of its investment holdings shocked Wall Street and depositors, sending its stock careening. The bank, which had $209 billion in assets at the end of 2022, had been working with financial advisers until Friday morning to find a buyer, a person with knowledge of the negotiations said.

While the woes facing Silicon Valley Bank are unique to it, a financial contagion appeared to spread through parts of the banking sector, prompting Treasury Secretary Janet Yellen to publicly reassure investors that the banking system was resilient.

Investors dumped stocks of peers of Silicon Valley Bank, including First Republic, Signature Bank and Western Alliance, many of which cater to start-up clients and have similar investment portfolios.

Trading in shares of at least five banks was halted repeatedly throughout the day as their steep declines triggered stock exchange volatility limits.

By comparison, some of the nation’s largest banks appeared more insulated from the fallout. After a slump on Thursday, shares of JPMorgan, Wells Fargo and Citigroup all were generally flat on Friday.

That’s because the biggest banks operate in a vastly different world. Their capital requirements are more stringent and they also have far broader deposit bases than banks like Silicon Valley, which do not attract masses of retail customers. Regulators have also tried to keep the big banks from focusing too heavily in a single area of business, and they have largely stayed away from riskier assets like cryptocurrencies.

Greg Becker, the president and chief executive of Silicon Valley Bank, last year. The bank’s downward spiral accelerated this week.

“I don’t think that this is an issue for the big banks — that’s the good news, they’re diversified,” said Sheila Bair, former chair of the F.D.I.C. Ms. Bair added that since the largest banks were required to hold cash equivalents even against the safest forms of government debt, they should be expected to have plenty of liquidity.

On Friday, Ms. Yellen discussed the issues surrounding Silicon Valley Bank with banking regulators, according to a statement from the Treasury Department.

Representatives from the Federal Reserve and the F.D.I.C. also held a bipartisan briefing for members of Congress organized by Maxine Waters, a Democrat from California and the ranking member of the House Financial Services Committee, according to a person familiar with the matter.

Silicon Valley Bank’s downward spiral accelerated with incredible speed this week, but its troubles have been brewing for more than a year. Founded in 1983, the bank had long been a go-to lender for start-ups and their executives.

Though the bank advertised itself as a “partner for the innovation economy,” some decidedly old-fashioned decisions led to this moment.

Flush with cash from high-flying start-ups that had raised a lot of money from venture capitalists, Silicon Valley Bank did what all banks do: It kept a fraction of the deposits on hand and invested the rest with the hope of earning a return. In particular, the bank put a large share of customer deposits into long-dated Treasury bonds and mortgage bonds which promised modest, steady returns when interest rates were low.

That had worked well for years. The bank’s deposits doubled to $102 billion at the end of 2020 from $49 billion in 2018. One year later, in 2021, it had $189.2 billion in its coffers as start-ups and technology companies enjoyed heady profits during the pandemic.

But it bought huge amounts of bonds just before the Federal Reserve began to raise interest rates a little more than a year ago, then failed to make provisions for the possibility that interest rates would rise very quickly. As rates rose, those holdings became less attractive because newer government bonds paid more in interest.

That might not have mattered so long as the bank’s clients didn’t ask for their money back. But because the gusher of start-up funding slowed at the same time as interest rates were rising, the bank’s clients began to withdraw more of their money.

To pay those redemption requests, Silicon Valley Bank sold off some of its investments. In its surprise disclosure on Wednesday, the bank admitted that it had lost nearly $2 billion when it was all but forced sell some of its holdings.

“It’s the classic Jimmy Stewart problem,” said Ms. Bair, referring to the actor who played a banker trying to stave off a bank run in the film “It’s a Wonderful Life.” “If everybody starts withdrawing money all at once, the bank has to start selling some of its assets to give money back to depositors.”

Those fears set off investor worries about some of the regional banks. Like Silicon Valley Bank, Signature Bank is also a lender that caters to the start-up community. It’s perhaps best known for its connections to former President Donald J. Trump and his family.

First Republic Bank, a San Francisco-based lender focused on wealth management and private banking services for high net worth clients in the tech industry, warned recently that its ability to earn profits is being hampered by rising interest rates. Its Phoenix-based peer in the wealth management industry, Western Alliance Bank, is facing similar pressures.

Separately, another bank, Silvergate, said on Wednesday that it was shutting down its operations and liquidating after suffering heavy losses from its exposure to the cryptocurrency industry.

A First Republic spokesman responded to a request for comment by sharing a filing the bank made to the Securities and Exchange Commission on Friday stating that its deposit base was “strong and very-well diversified” and that its “liquidity position remains very strong.”

A Western Alliance spokeswoman pointed to a news release by the bank on Friday describing the condition of its balance sheet. “Deposits remain strong,” the statement said. “Asset quality remains excellent.”

Representatives of Signature and Silicon Valley Bank had no comment. Representatives for the Federal Reserve and F.D.I.C. declined to comment.

Some banking experts on Friday pointed out that a bank as large as Silicon Valley Bank might have managed its interest rate risks better had parts of the Dodd-Frank financial-regulatory package, put in place after the 2008 crisis, not been rolled back under President Trump.

In 2018, Mr. Trump signed a bill that lessened regulatory scrutiny for many regional banks. Silicon Valley Bank’s chief executive, Greg Becker, was a strong supporter of the change, which reduced how frequently banks with assets between $100 billion and $250 billion had to submit to stress tests by the Fed.

At the end of 2016, Silicon Valley Bank’s asset size was $45 billion. It had jumped to more than $115 billion by the end of 2020.

Friday’s upheaval raised uncomfortable parallels to the 2008 financial crisis. Although it’s not uncommon for small banks to fail, the last time a bank of this magnitude unraveled was in 2008, when the F.D.I.C. took over Washington Mutual.

The F.D.I.C. rarely takes over banks when the markets are open, preferring to put a failing institution into receivership on a Friday after business has closed for the weekend. But the banking regulator put out a news release in the first few hours of trading on Friday, saying that it created a new bank, the National Bank of Santa Clara, to hold the deposits and other assets of the failed one.

The regulator said that the new entity would be operating by Monday and that checks issued by the old bank would continue to clear. While customers with deposits of up to $250,000 — the maximum covered by F.D.I.C. insurance — will be made whole, there’s no guarantee that depositors with larger amounts in their accounts will get all of their money back.

Those customers will be given certificates for their uninsured funds, meaning they would be among the first in line to be paid back with funds recovered while the F.D.I.C. holds Silicon Valley Bank in receivership — although they might not get all of their money back.

When the California bank IndyMac failed in July 2008, it, like Silicon Valley Bank, did not have an immediate buyer. The F.D.I.C. held IndyMac in receivership until March 2009, and large depositors eventually only received 50 percent of their uninsured funds back. When Washington Mutual was bought by JPMorgan Chase, account holders were made whole.

Emily Flitter covers finance. She is the author of “The White Wall: How Big Finance Bankrupts Black America.” @FlitterOnFraud

Rob Copeland covers Wall Street and banking. @realrobcopeland

https://www.nytimes.com/2023/03/10/business/silicon-valley-bank-stock.html

US looks at fresh bank investment after $26bn losses

US looks at fresh bank investment after $26bn losses
The US government is investigating new ways of addressing continued dislocation in the US banking sector, contemplating a second round of investment in the hope of reducing banks' exposures to "toxic" illiquid assets.

By James Quinn, Wall Street Correspondent

Last Updated: 11:35PM GMT 16 Jan 2009


Officials from within the Bush administration – in their final days ahead of President-elect Barack Obama's inauguration on Tuesday – are looking at a wide range of options to tackle the crisis in the country's major banks.
High on the list is understood to be a plan to roll out guarantees to back-stop further losses, the like of which have already been granted to Citigroup and Bank of America (BoA).
Another option would be to create some form of vehicle to remove assets from balance sheets once and for all, similar to outgoing Treasury Secretary Hank Paulson's original intention for the $700bn (£474bn) bank bail-out fund.
The discussions, which are understood to involve members of Obama's transition team, have been continuing for a number of weeks, as it has become increasingly clear that the problems in the banking sector have not been stopped by the $125bn round of capital injections into the country's nine major banks.
In addition to the impact the dislocation in the housing market has had on US banks' balance sheets, there is a growing threat from the deterioration in consumer credit, with car loans, unsecured personal loans and credit cards all showing signs of increasing default.
The problems within the US banking market were exemplified in the last few days by a batch of dismal financial results from some of the major banks, with heavy losses sending shares plummeting as concerns that 2009 may yet be as bad a year for financials as 2008 surfaced.
Shares in all the major banks fell yesterday, with BoA closing down 14pc, Citigroup off 9pc and JP Morgan Chase ending the day 6pc lower.
The falls came after Citigroup reported a post-tax loss of $8.29bn in the fourth quarter, its fifth consecutive loss, albeit within the $6bn-$10bn range analysts had been forecasting.
Alongside the results, chief executive Vikram Pandit outlined his plan to split the bank into two units;

• Citicorp, its core banking business with assets of $1,100bn; and


• Citi Holdings, which will essentially be made up of its troublesome brokerage and asset management business, with assets of $850bn.

Meanwhile, BoA continued to stumble, reporting its first loss since 1991, a quarterly post-tax loss of $2.39bn. This figure did not include Merrill Lynch's $15.31bn loss for the fourth quarter, because the purchase was only completed on January 1.
Nevertheless, Merrill's losses continue to weigh heavily on its new parent, which yesterday revealed it is to receive a fresh $20bn capital injection from the US Treasury and a guarantee from the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) back-stopping the losses on $118bn of Merrill's most toxic assets.
In return, the bank will have to issue $4bn of preferred shares yielding an 8pc coupon, as well as paying 8pc-a-year on the $20bn, issue further warrants and cut its dividend and place a cap on executive pay and bonuses.
BoA chairman Ken Lewis, who has come under fire for going ahead with the Merrill deal in spite of the dismal state of its finances, said that in December he looked into backing out of the deal, but that government officials told him to do so could create "serious systemic harm".

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4274591/US-looks-at-fresh-bank-investment-after-26bn-losses.html

'Toxic bank’ to soak up bad debts in UK

Financial crisis: The banks are still sinking
Ministers plan a 'toxic bank’ to soak up bad debts and unfreeze the money markets. But will it work, asks Katherine Griffiths.

Last Updated: 12:08PM GMT 16 Jan 2009
Comments 9 Comment on this article


Hang on – didn’t we save Britain’s banks in October? That was when the Government gave £500 billion to inject capital into Royal Bank of Scotland (RBS), Lloyds and HBOS and pledged ongoing support to get high-street lenders back on their feet.
So, why are banks’ share prices still plummeting, while they refuse to lend to each other because they are suspicious about what hidden nasties are on their rivals’ balance sheets? Their chief executives privately warn the Government – they are reluctant to deliver this message in public – that they do not have the cash to provide mortgages and loans to individuals and businesses.
The reality is that, while the Prime Minister, the self-styled saviour of the world, rode high in public opinion in October and November for leading the charge to deal with the global banking crisis, in fact what the Government had done was to carry out emergency surgery to save the banks – and the entire financial system – from immediate collapse.
Now it is time for the more painful process of restoring the patient to health. For the banks the medicine is going to be unpleasant to swallow – it will mean shrunken salaries and no bonuses for many. For the rest of us it is going to be expensive and could take years to administer.
The Government is understandably unwilling to come out with this prognosis, but it needs to do so soon. The US has been ahead of Britain in preparing for a second round of emergency operations on its banks, with Citigroup set to be split into a “good” and “bad” bank so that investors can feel confident about owning its shares again.
Switzerland has also set up a special entity to swallow about £30 billion of toxic assets from its largest bank, UBS, so that it can begin the process of recovery.
In the UK, we have seen this week measures from Lord Mandelson’s department to help small businesses, but they will only have a marginal impact unless ministers can deal with the banking disease at the heart of the problem.
Now, the word out of Downing Street is that ministers are on the case and are preparing to announce the creation of a “toxic bank” to soak up more than £30 billion of British banks’ bad debts. The plan will form the centrepiece of a fresh bail-out designed to get them lending again, to each other and to their customers.


The difficulties the Government faces are immense.
The wholesale markets, which banks use for much of their funding so that they can lend to customers, remain frozen. This is because of a breakdown of trust between financial institutions: no one can be sure what problems banks are sitting on, so investors do not want to lend them money in case more difficulties emerge and they lose their cash.
What is needed most is clarity: what really is on the books of each bank? It is difficult to put a price on their troubled assets, many of which are based on the collapsed subprime loans sector in the US.
The Government is hoping that clarity is coming soon. In the next few weeks, the banks will report their results for 2008, and to do so they need to get their figures signed off by auditors. The auditing firms – such as PricewaterhouseCoopers, KPMG and Deloitte – will have to agree to the valuation of banks’ assets.
The accountants will want to get these values right because, if their banking clients should fail later, the first port of call for potential shareholders’ lawsuits will be the deep-pocketed auditors.
In anticipation, ministers are preparing the creation of that “toxic bank” to allow for a fresh start.
In theory, it will suck in all of the failing assets that have poisoned the banks’ balance sheets and destroyed confidence in the system. That would leave the remaining banks cleansed and able to attract both investors who want to put their capital in banks’ shares, and providers of funds so that the wholesale markets would be defrosted, and lending could be restarted.
Of course, if it was as simple as that, a bad bank would have been constituted months ago and Gordon Brown and Alistair Darling would be hailing it as part of their world-leading financial recovery plan.
As Sweden found when it had to take similar measures in the early Nineties, creating a bad bank is fraught with problems. As with this entire crisis, the main challenge is how to value the assets.
In order to take control of the toxic investments, the Government would have to give the banks some money in return.
If it sets the price too low, banks will either refuse to hand the assets over, thereby not solving the systemic problem of a lack of confidence, or will have to take new write-downs to recognise the lower value, further weakening their own books. If the price is too high, there will be an outcry that taxpayers’ money is being squandered to save bankers’ skins.
Ministers are keen to ensure that banks are not seen by the public as being let off the hook. Consequently, they are informing executives that we are entering a new world of lower bonuses, less risk-taking and smaller profits.
Rather than the “green shoots” of recovery suggested by business minister Baroness Vadera on Wednesday, the Government has to be prepared to come out with more bleak news.
RBS, until a year and a half ago Britain’s biggest banking success story, is now almost 60 per cent owned by the taxpayer and in its present state is essentially finished as a private institution. The problems at HBOS, comprised of Halifax and Bank of Scotland, are greater than anticipated, and its new owner – Lloyds TSB – will struggle to cope unless it receives more help from the public purse.
Northern Rock, which the Government had hoped to flip from its nationalised state back to the private sector for a quick profit, now looks like the most sensible home for the bad bank and so will have to spend many years in public hands.
And Barclays, the only major high street bank apart from HSBC to avoid participating in the October bail-out, looks increasingly as if it will have to accept government cash, either by using the bad bank or by being involved in a potential further round of cash injections into the banking sector.
It is not all doom and gloom. The Government can make a reasonable case that it is more sensible to create a bad bank than to inject more cash straight into banks, as the investments could simply be wiped out.
This would lead to complete nationalisation of the banking sector, which the Government is unwilling to do until it has tried other measures first.
But a bad bank alone will not kick-start the economy. The Government must get to work with other countries to rethink the “Basle II” banking rules that dictate how institutions lend. They contributed to the banks’ lending bubble, rather than preventing it, by enabling them to place large amounts of new types of debt off balance sheets and beyond the reach of regulators.
And it is clear that in Britain, the tweaks to VAT were inadequate: more tax cuts are required fast.
It is not difficult to see why ministers have taken their time: many, along with their advisers, have not lived through difficult economic times. While the Government had to react quickly last year to a succession of blow-ups, it says it now wants to get its policy right for the longer term.
To do otherwise will lead to lawsuits, such as the one going through the courts over Northern Rock’s nationalisation.
More importantly, spending billions of pounds more of taxpayers’ money on a policy that fails to hit the mark would be disastrous.
The Government has the critical next stage of its rescue of the banking system close to completion. An announcement is expected as early as next week.
All of us, consumers and bankers, had better hope it works.



http://www.telegraph.co.uk/finance/financetopics/recession/4250231/Financial-crisis-The-banks-are-still-sinking.html



Comment:
This is akin to Danaharta and Danamodal approach adopted by Malaysia in 1997-1998 Asian Financial Crisis.