Silicon Valley Bank, a well-known financial institution catering to the start-up industry, has been shut down by US regulators. This marks the biggest retail banking failure since the global financial crisis. The move comes after the bank announced that it had sold $21 billion of securities from its portfolio at a $1.8 billion loss. The Group was holding a $2.25 billion share sale to shore up finances, which included US Treasuries and mortgage-backed securities.
The decision to sell the securities was prompted by high deposit outflows at the bank due to a broader downturn in the start-up industry. The rise of Fed rates also led to a chain reaction, downgrading the value of SVB’s bonds, leading to a decline in its net interest income.
The shares of SVB saw their biggest one-day drop on record as they plunged by more than 60% and lost another 20% in after-hours trade. Silicon Valley Bank’s Chief Executive Officer, Greg Becker, said in a letter to shareholders, “We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash-burn levels from our clients as they invest in their businesses.”
The situation has prompted prominent venture capitalists to advise their portfolio businesses to withdraw their money from SVB, even as the bank urged a calm response. Founders Fund, a high-profile VC firm, asked its portfolio companies to move their money, Bloomberg News reported.
The move has left many in the start-up industry surprised, as SVB had previously been known for its support of start-ups, particularly during the Covid-19 pandemic. Hannah Chelkowski, founder of Blank Ventures, a fund that invests in financial technology, told the BBC the situation was “wild”. “It’s crazy how it’s just unravelled like this… The interesting thing is that it’s the most start-up friendly bank and supported start-ups so much through Covid. Now VCs are telling their portfolio companies to pull their funds,” she said.
The closure of Silicon Valley Bank serves as a reminder of the importance of financial stability, particularly in the face of rising interest rates. As India’s top banker Uday Kotak tweeted, “When interest rates move up 500 bps from zero in a year, an accident was waiting to happen somewhere.”
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