The shocking collapse of Silicon Valley Bank on Friday sent jitters through global markets. It walloped banking stocks, with companies scrambling to figure out how to manage their finances after the sudden shutdown.
Some financial industry executives and investors are increasingly concerned that the collapse could domino affect other U.S. regional banks if regulators did not find a buyer over the weekend to protect uninsured deposits.
Startup-focused lender SVB Financial Group became the largest bank to fail since the 2008 financial crisis, leaving California tech entrepreneurs worrying about how to make payroll and billions of dollars belonging to companies and investors stranded.
Investors worry that the U.S. Federal Reserve’s (Fed) aggressive interest rate increases to fight inflation are exposing vulnerabilities in the financial system.
The Federal Deposit Insurance Corporation (FDIC), appointed receiver, was trying to find another bank over the weekend willing to merge with Silicon Valley Bank, people familiar with the matter said on Friday.
Some industry executives said such a deal would be sizable for any bank and would likely require regulators to give unique guarantees and make other allowances for any buyer.
With $209 billion in assets, the Santa Clara, California-based lender was the 16th largest U.S. bank, making the list of potential buyers who could pull off a deal over a weekend relatively short, they said on the condition of anonymity because the situation is in flux.
Concern and panic
U.S. customers with less than $250,000 in the bank can count on insurance provided by the Federal Deposit Insurance Corp. Regulators are trying to find a buyer for the bank in hopes customers with more than that can be made whole.
That includes customers like Circle, a big player in the cryptocurrency industry. It said it has about $3.3 billion of the roughly $40 billion in reserves for its USDC coin at SVB. That caused USD Coin’s value, which tries to stay firmly at $1, to plunge below 87 cents Saturday briefly. However, it later rose back above 97 cents, according to CoinDesk.
Across the Atlantic, startup companies woke up Saturday to find SVB’s U.K. business will stop making payments or accepting deposits.
The Bank of England (BoE) said late Friday that it will put Silicon Valley Bank U.K. in its insolvency procedure, which will pay out eligible depositors up to 170,000 British pounds ($204,544) for joint accounts "as quickly as possible."
"We know that there are a large number of startups and investors in the ecosystem who have significant exposure to SVB UK and will be very concerned," Dom Hallas, executive director of Coadec, which represents British startups, said Twitter. He cited "concern and panic."
The Bank of England said SVB U.K.’s assets would be sold to pay creditors.
New fund mulled
Bloomberg reported that the Fed and the FDIC were weighing the creation of a fund that would allow regulators to backstop more deposits at banks that run into trouble.
The report said that regulators discussed the new particular vehicle in conversations with banking executives and hoped such a measure would reassure depositors and help contain any panic.
However, it was unclear if regulators would have the political support to throw a lifeline to the bank, catering to Silicon Valley startups and investors.
The White House said on Saturday that President Joe Biden had spoken with California Gov. Gavin Newsom about the bank and efforts to address the situation.
"Everyone is working with FDIC to stabilize the situation as quickly as possible," Newsom said on Saturday.
Newsom said he’s talking with the White House to help "stabilize the situation as quickly as possible, to protect jobs, people’s livelihoods, and the entire innovation ecosystem that has served as a tent pole for our economy."
Spotlight on other banks
Some analysts and prominent investors warned that without a resolution by Monday, other banks could come under pressure if people worried about their deposits.
"The good news is it is unlikely an SVB-style bankruptcy will extend to the large banks," risk and financial advisory firm Kroll said in a research note.
However, small community banks could face issues, and the risk is "much higher if uninsured depositors of SVB aren’t made whole and have to take a haircut on their deposits," Kroll added.
Silicon Valley Bank had an unusually high deposit not covered by the FDIC’s guarantees, which are capped at $250,000.
Billionaire hedge fund manager Bill Ackman tweeted on Saturday that failure to protect all depositors could also lead to the withdrawal of uninsured deposits from other institutions.
"These withdrawals will drain liquidity from community, regional, and other banks and begin the destruction of these important institutions," Ackman warned.
Kyle Bass, founder, and chief investment officer of Hayman Capital Management, told Reuters that the Fed needed to "arrange a marriage" for SVB by Sunday evening before markets opened in Asia.
"And they’ve got to assure depositors that they will be paid in full because of this merger and restore stability in the banking system," he added.
Regional and smaller bank shares were hit hard on Friday. The S&P 500 regional banks index dropped 4.3%, losing 18%, its worst week since 2009.
Signature Bank dropped about 23%, while San Francisco-based First Republic Bank fell 15%. Western Alliance Bancorp tumbled 21%, and PacWest Bancorp dropped 38% after those stocks were halted several times due to volatility. Charles Schwab Corp slumped more than 11%.
Some banks could look to preemptively raise capital to fortify their balance sheets or try to strike deals of their own, industry executives said.
When IndyMac and Washington Mutual collapsed in 2008, the FDIC found other firms to take on the assets and keep deposits intact. If no buyer is found for SVB, uninsured depositors will probably be left with a portion of whatever funds the FDIC can raise by selling off the bank’s assets.
Global dominoes
In the U.K., Treasury chief Jeremy Hunt said on Sunday he was working with Prime Minister Rishi Sunak and the Bank of England to "avoid or minimize the damage" resulting from the chaos that has engulfed the lender.
"We’ve been working at pace over the weekend, through the night," Hunt told Sky News. "We will bring forward plans to make sure people can meet their cashflow requirements to pay their staff."
Given the importance of the bank to its customers, its failure could have a significant impact on some companies, he said.
More than 250 British tech firm executives signed a letter addressed to Hunt on Saturday calling for government intervention, a copy seen by Reuters shows.
Advisory firm Rothschild & Co is exploring options for Silicon Valley Bank U.K. Limited as insolvency looms, two people familiar with the discussions told Reuters on Saturday.
Some experts, however, see the fallout from the latest collapse as limited. "We do not see this as the start of a broader threat to the safety and soundness of the banking system," TD Cowen analyst Jaret Seiberg said on Friday.
"Silicon Valley had a unique business model less dependent on retail deposits than a traditional bank."