The Revenge Of 2008

That clearly audible, season-ending, ligament-tearing pop you heard on Friday morning was the last of the crypto tech bubble disintegrating as California's favorite unicorn VC bubble factory Silicon Valley Bank died a rapid death.

Financial regulators have closed Silicon Valley Bank and taken control of its deposits, the Federal Deposit Insurance Corp. announced Friday, in what is the largest U.S. bank failure since the global financial crisis more than a decade ago.

The collapse of SVB, a key player in the tech and venture capital community, leaves companies and wealthy individuals largely unsure of what will happen to their money.

According to press releases from regulators, the California Department of Financial Protection and Innovation closed SVB and named the FDIC as the receiver. The FDIC in turn has created the Deposit Insurance National Bank of Santa Clara, which now holds the insured deposits from SVB.

The FDIC said in the announcement that insured depositors will have access to their deposits no later than Monday morning. SVB’s branch offices will also reopen at that time, under the control of the regulator.

According to the press release, SVB’s official checks will continue to clear.

The FDIC’s standard insurance covers up to $250,000 per depositor, per bank, for each account ownership category. The FDIC said uninsured depositors will get receivership certificates for their balances. The regulator said it will pay uninsured depositors an advanced dividend within the next week, with potential additional dividend payments as the regulator sells SVB’s assets.

Whether depositors with more than $250,000 ultimately get all their money back will be determined by the amount of money the regulator gets as it sells Silicon Valley assets or if another bank takes ownership of the remaining assets. There were concerns in the tech community that until that process unfolds, some companies may have issues making payroll.

As of the end of December, SVB had roughly $209 billion in total assets and $175.4 billion in total deposits, according to the press release. The FDIC said it was unclear what portion of those deposits were above the insurance limit.

The last U.S. bank failure of this size was Washington Mutual in 2008, which had $307 billion in assets.

 

Now traditionally, a really big bank like Bank of America or Wells Fargo would step in and pick up Silicon Valley Bank's assets for pennies on the dollar and would continue all of the bank's functions, accounts, and payment processing. 

 

Except...that's not happening.  No bank stepped up on Thursday to save Silicon Valley. Recent interest rate hikes by the Fed have scared off buyers.

 

The real problem is while the FDIC protects individual accounts with up to $250,000 in deposits, SVB had nearly all of its assets uninsured because they were large corporate accounts well over that number.

Friday’s announcement by the Federal Deposit Insurance Corporation that the bank was closed came with few specifics on what will happen to bank customers who held more than the $250,000 per account that is guaranteed by the government.

In prior large bank failures like IndyMac and Washington Mutual, the FDIC found other firms to take on the assets and keep deposits intact. But failing that, uninsured depositors will be left with a portion of whatever funds the FDIC can raise selling off the bank's assets.

SVB Financial Group's (SIVB.O) Silicon Valley Bank had a relatively high amount of uninsured deposits as it courted tech workers and venture capital firms. The FDIC said on Friday the amount of uninsured deposits at the bank was “undetermined,” likely complicated by the rush of bank customers to remove uninsured funds. But data submitted to the FDIC by the bank at the end of 2022 showed that 89% of its $175 billion in deposits were uninsured.

We'll see if the firewalls put in since 2008 are going to function. If there's any silver lining, it could be that SVB's collapse might get the Fed to hold off on more rate hikes.

Maybe.