This week, the go-to bank for U.S. tech startups came rapidly unglued, leaving its high-powered customers and investors in limbo.
Silicon Valley Bank, facing a sudden bank run and capital crisis, collapsed Friday morning and was taken over by federal regulators.
It was the largest failure of a U.S. bank since Washington Mutual in 2008.
Here's what we know about the bank's downfall, and what might come next.
WHAT IS SVB?
Founded in 1983, SVB specialized in banking for tech startups. It provided financing for almost half of US venture-backed technology and health care companies.
While relatively unknown outside of Silicon Valley, SVB was among the top 20 American commercial banks, with US$209 billion in total assets at the end of last year, according to the FDIC.
WHY DID IT FAIL?
In short, SVB encountered a classic run on the bank.
The longer version is a bit more complicated.
Several forces collided to take down the banker.
First, there was the Federal Reserve, which began raising interest rates a year ago to tame inflation. The Fed moved aggressively, and higher borrowing costs sapped the momentum of tech stocks that had benefited SVB.
Higher interest rates also eroded the value of long-term bonds that SVB and other banks gobbled up during the era of ultra-low, near-zero interest rates. SVB's US$21 billion bond portfolio was yielding an average of 1.79% 鈥� the current 10-year Treasury yield is about 3.9%.
At the same time, venture capital began drying up, forcing startups to draw down funds held by SVB. So the bank was sitting on a mountain of unrealized losses in bonds just as the pace of customer withdrawals was escalating.
THE PANIC TAKES ROOT...
On Wednesday, SVB announced it had sold a bunch of securities at a loss, and that it would also sell US$2.25 billion in new shares to shore up its balance sheet. That triggered a panic among key venture capital firms, who reportedly advised companies to withdraw their money from the bank.
The bank's stock began plummeting Thursday morning and by the afternoon it was dragging other bank shares down with it as investors began to fear a repeat of the 2007-08 financial crisis.
By Friday morning, trading in SVB shares was halted and it had abandoned efforts to quickly raise capital or find a buyer. California regulators intervened, shutting the bank down and placing it in receivership under the Federal Deposit Insurance Corporation.
CONTAGION FEARS SUBSIDE
Despite initial panic on Wall Street, analysts said SVB's collapse is unlikely to set off the kind of domino effect that gripped the banking industry during the financial crisis.
"The system is as well-capitalized and liquid as it has ever been," Moody's chief economist Mark Zandi said. "The banks that are now in trouble are much too small to be a meaningful threat to the broader system."
No later than Monday morning, all insured depositors will have full access to their insured deposits, according to the FDIC. It will pay uninsured depositors an "advance dividend within the next week."
WHAT'S NEXT?
So, while a broader contagion is unlikely, smaller banks that are disproportionately tied to cash-strapped industries like tech and crypto may be in for a rough ride, according to Ed Moya, senior market analyst at Oanda.
"Everyone on Wall Street knew that the Fed's rate-hiking campaign would eventually break something, and right now that is taking down small banks," Moya said on Friday.
The FDIC typically sells a failed bank's assets to other banks, using the proceeds to repay depositors whose funds weren't insured.
A buyer could still emerge for SVB, though it's far from guaranteed.
