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SVB logo through rain
SVB was forced to recognize a $1.8bn loss on Wednesday. Photograph: Justin Sullivan/Getty Images
SVB was forced to recognize a $1.8bn loss on Wednesday. Photograph: Justin Sullivan/Getty Images

Why did Silicon Valley Bank fail?

This article is more than 1 year old

Shutdown and takeover of bank by regulators can be traced to the Fed raising interest rates and risk-averse investors

The shutdown and takeover of Silicon Valley Bank by regulators on Friday can be traced to the US Federal Reserve raising interest rates and souring the risk appetite of investors.

Here is the sequence of events that led to the failure:

Federal Reserve raises rates

The Federal Reserve has been raising interest rates from their record-low levels since last year in its bid to fight inflation. Investors have less appetite for risk when the money available to them becomes expensive due to the higher rates. This weighed on technology startups – the primary clients of Silicon Valley Bank – because it made their investors more risk-averse.

Some Silicon Valley Bank clients face cash crunch

As higher interest rates caused the market for initial public offerings to shut down for many startups and made private fundraising more costly, some Silicon Valley Bank clients started pulling money out to meet their liquidity needs. This culminated in Silicon Valley Bank looking for ways this week to meet its customers’ withdrawals.

Bank sells bond portfolio at a loss

To fund the redemptions, on Wednesday Silicon Valley Bank sold a $21bn bond portfolio consisting mostly of US Treasuries. The portfolio was yielding it an average 1.79%, far below the current 10-year Treasury yield of about 3.9%. This forced SVB to recognize a $1.8bn loss, which it needed to fill through a capital raise.

SVB announces stock sale

SVB announced on Thursday that it would sell $2.25bn in common equity and preferred convertible stock to fill its funding hole. Its shares ended trading on the day down 60%, as investors fretted that the deposit withdrawals might push it to raise even more capital.

Stock sale collapses

Some SVB clients pulled their money from the bank on the advice of venture capital firms such as Peter Thiel’s Founders Fund, Reuters reported. This spooked investors such as General Atlantic that SVB had lined up for the stock sale, and the capital raising effort collapsed late on Thursday.

SVB goes into receivership

SVB scrambled on Friday to find alternative funding, including through a sale of the company. Later in the day, however, the Federal Deposit Insurance Corporation (FDIC) then announced that SVB was shut down and placed under its receivership. The FDIC added that it would seek to sell SVB’s assets and that future dividend payments may be made to uninsured depositors.

More on this story

More on this story

  • Trading halted in shares of two more US lenders as fears of banking crisis mount

  • JP Morgan boss plays down risk of crisis after second biggest bank failure in US history

  • Time running out for US financial firms to bid for ailing bank First Republic

  • Allowing Silicon Valley Bank UK to fail would have caused domino effect, FCA suggests

  • Silicon Valley Bank: most of failed lender bought by First Citizens

  • Silicon Valley Bank’s collapse will not be a one-off – a banking crisis was long overdue

  • UBS agrees to takeover of stricken Credit Suisse for $3.25bn

  • Credit Suisse shares continue to fall despite efforts to calm nerves

  • What is happening in financial markets and could there be a global crisis?

  • SVB collapse may be start of ‘slow-rolling crisis’, warns BlackRock boss

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