Silicon Valley Bank, a 40-year-old lender for startups and venture capitalists, suffered a shock closure on Friday due to liquidity fears and sent shockwaves across the tech world. The bank's parent company, SVB Financial, had taken a $1.8 billion hit from a fire sale of its bond holdings and faced a cash crunch due to a rise in interest rates and a meltdown in the tech sector. The FDIC rushed to seize the assets of the bank, the biggest failure of a US financial institution since the height of the 2008 financial crisis, and created the National Bank of Santa Clara to take over the deposits and other assets of the failed SVB.
This closure has immediate effects such as delay to payrolls and forcing customers to withdraw funds in excess of the $250,000 insured cap of the FDIC. Further, Chinese tech firms have been scrambling to move their money to other lenders, and US investors may find it difficult to fund Chinese startups. Treasury Secretary Janet Yellen and White House Council of Economic Advisers Chairwoman Cecilia Rouse have expressed confidence in the bank regulators to take appropriate action.
The closure of the SVB has sparked a political debate over the role of the federal government in protecting the US financial sector, with California Governor Gavin Newsom (D) and the Biden administration discussing potential Government Assistance. Wall Street banks may be willing to buy SVB's assets and make all depositors whole, but this could cause a risky bet and they may ask for government help. The FDIC is ready to begin unwinding the bank’s balance sheet if it cannot find another bank to take over all the SVB business, and customers with uninsured deposits are expected to receive some money back by next week.
The exact amount is unknown and banking experts are confident that the closure will not trigger a broader crisis in the industry. However, the long-term impact of SVB's failure on the US financial system remains to be seen.