One of Silicon Valley's Top Banks Fails; Assets are Seized

The four biggest US banks lost a whopping $52 billion in market value on Thursday. TIMOTHY A. CLARY / AFP/File
The four biggest US banks lost a whopping $52 billion in market value on Thursday. TIMOTHY A. CLARY / AFP/File
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One of Silicon Valley's Top Banks Fails; Assets are Seized

The four biggest US banks lost a whopping $52 billion in market value on Thursday. TIMOTHY A. CLARY / AFP/File
The four biggest US banks lost a whopping $52 billion in market value on Thursday. TIMOTHY A. CLARY / AFP/File

Regulators rushed Friday to seize the assets of one of Silicon Valley's top banks, marking the largest failure of a US financial institution since the height of the financial crisis almost 15 years ago.

Silicon Valley Bank, the nation’s 16th-largest bank, failed after depositors hurried to withdraw money this week amid anxiety over the bank’s health. It was the second biggest bank failure in US history after the collapse of Washington Mutual in 2008.
The bank served mostly technology workers and venture capital-backed companies, including some of the industry's best-known brands.

“This is an extinction-level event for startups,” said Garry Tan, CEO of Y Combinator, a startup incubator that launched Airbnb, DoorDash and Dropbox and has referred hundreds of entrepreneurs to the bank.

“I literally have been hearing from hundreds of our founders asking for help on how they can get through this. They are asking, ‘Do I have to furlough my workers?’”

There appeared to be little chance of the chaos spreading in the broader banking sector, as it did in the months leading up to the Great Recession. The biggest banks — those most likely to cause an economic meltdown — have healthy balance sheets and plenty of capital.

Nearly half of the US technology and health care companies that went public last year after getting early funding from venture capital firms were Silicon Valley Bank customers, according to the bank’s website.

The bank also boasted of its connections to leading tech companies such as Shopify, ZipRecruiter and one of the top venture capital firms, Andreesson Horowitz.

Tan estimated that nearly one-third of Y Combinator’s startups will not be able to make payroll at some point in the next month if they cannot access their money.

Internet TV provider Roku was among casualties of the bank collapse. It said in a regulatory filing Friday that about 26% of its cash — $487 million — was deposited at Silicon Valley Bank.

Roku said its deposits with SVB were largely uninsured and it didn’t know “to what extent” it would be able to recover them.

As part of the seizure, California bank regulators and the FDIC transferred the bank's assets to a newly created institution — the Deposit Insurance Bank of Santa Clara. The new bank will start paying out insured deposits on Monday. Then the FDIC and California regulators plan to sell off the rest of the assets to make other depositors whole.

There was unease in the banking sector all week, with shares tumbling by double digits. Then news of Silicon Valley Bank's distress pushed shares of almost all financial institutions even lower Friday.

The failure arrived with incredible speed. Some industry analysts suggested Friday that the bank was still a good company and a wise investment. Meanwhile, Silicon Valley Bank executives were trying to raise capital and find additional investors. However, trading in the bank’s shares was halted before stock market's opening bell due to extreme volatility.

Shortly before noon, the FDIC moved to shutter the bank. Notably, the agency did not wait until the close of business, which is the typical approach. The FDIC could not immediately find a buyer for the bank's assets, signaling how fast depositors cashed out.

The White House said Treasury Secretary Janet Yellen was “watching closely.” The administration sought to reassure the public that the banking system is much healthier than during the Great Recession.

“Our banking system is in a fundamentally different place than it was, you know, a decade ago,” said Cecilia Rouse, chair of the White House Council of Economic Advisers. “The reforms that were put in place back then really provide the kind of resilience that we’d like to see.”

In 2007, the biggest financial crisis since the Great Depression rippled across the globe after mortgage-backed securities tied to ill-advised housing loans collapsed in value. The panic on Wall Street led to the demise of Lehman Brothers, a firm founded in 1847.
Because major banks had extensive exposure to one another, the crisis led to a cascading breakdown in the global financial system, putting millions out of work.

At the time of its failure, Silicon Valley Bank, which is based in Santa Clara, California, had $209 billion in total assets, the FDIC said. It was unclear how many of its deposits were above the $250,000 insurance limit, but previous regulatory reports showed that lots of accounts exceeded that amount.

The bank announced plans Thursday to raise up to $1.75 billion in order to strengthen its capital position. That sent investors scurrying and shares plunged 60%. They tumbled lower still Friday before the opening of the Nasdaq, where the bank's shares were traded.

As its name implied, Silicon Valley Bank was a major financial conduit between the technology sector, startups and tech workers. It was seen as good business sense to develop a relationship with the bank if a startup founder wanted to find new investors or go public.

Conceived in 1983 by co-founders Bill Biggerstaff and Robert Medearis during a poker game, the bank leveraged its Silicon Valley roots to become a financial cornerstone in the tech industry.

Bill Tyler, director of operations for TWG Supply in Grapevine, Texas, said he first realized something was wrong when his employees texted him at 6:30 a.m. Friday to complain that they did not receive their paychecks.

TWG, which has just 18 employees, had already sent the money for the checks to a payroll services provider that used Silicon Valley Bank. Tyler was scrambling to figure out how to pay his workers.

"We’re waiting on roughly $27,000," he said. "It’s already not a timely payment. It’s already an uncomfortable position. I don’t want to ask any employees, to say, ‘Hey, can you wait until mid-next week to get paid?’”

Silicon Valley Bank's ties to the tech sector added to its troubles. Technology stocks have been hit hard in the past 18 months after a growth surge during the pandemic, and layoffs have spread throughout the industry. Venture capital funding has also been declining.

At the same time, the bank was hit hard by the Federal Reserve's fight against inflation and an aggressive series of interest rate hikes to cool the economy.

As the Fed raises its benchmark interest rate, the value of generally stable bonds starts to fall. That is not typically a problem, but when depositors grow anxious and begin withdrawing their money, banks sometimes have to sell those bonds before they mature to cover the exodus.

That is exactly what happened to Silicon Valley Bank, which had to sell $21 billion in highly liquid assets to cover the sudden withdrawals. It took a $1.8 billion loss on that sale.

Ashley Tyrner, CEO of FarmboxRx, said she had spoken to several friends whose businesses are backed by venture capital. She described them as being “beside themselves” over the bank's failure. Tyrner's chief operating officer tried to withdraw her company's funds on Thursday but failed to do so in time.

“One friend said they couldn't make payroll today and cried when they had to inform 200 employees because of this issue,” Tyrner said.



China Flags More Policy Measures to Bolster Yuan

 People shop around for prosperity decorations for the upcoming Chinese Lunar New Year, at a New Year Bazaar in Beijing, Monday, Jan. 13, 2025. (AP)
People shop around for prosperity decorations for the upcoming Chinese Lunar New Year, at a New Year Bazaar in Beijing, Monday, Jan. 13, 2025. (AP)
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China Flags More Policy Measures to Bolster Yuan

 People shop around for prosperity decorations for the upcoming Chinese Lunar New Year, at a New Year Bazaar in Beijing, Monday, Jan. 13, 2025. (AP)
People shop around for prosperity decorations for the upcoming Chinese Lunar New Year, at a New Year Bazaar in Beijing, Monday, Jan. 13, 2025. (AP)

China announced more tools to support its weak currency on Monday, unveiling plans to park more dollars in Hong Kong to bolster the yuan and to improve capital flows by allowing companies to borrow more overseas.

A dominant dollar, sliding Chinese bond yields and the threat of higher trade barriers when Donald Trump begins his US presidency next week have left the yuan wallowing around 16-month lows, spurring the central bank into action.

The People's Bank of China (PBOC) has tried other means to arrest the sliding yuan since late last year, including warnings against speculative moves and efforts to shore up yields.

On Monday, authorities warned again against speculating against the yuan. The PBOC raised the limits for offshore borrowings by companies, ostensibly to allow more foreign exchange to flow in.

PBOC Governor Pan Gongsheng meanwhile told the Asia Financial Forum in Hong Kong that the central bank will substantially increase the proportion of China's foreign exchange reserves in Hong Kong, without providing details.

China's foreign reserves stood at around $3.2 trillion at the end of December. Not much is known about where the reserves are invested.

"Today's comments from the PBOC indicate that currency stability remains an important priority for the central bank, despite the market often discussing the possibility of intentional devaluation to offset tariffs," said Lynn Song, chief economist for Greater China at ING.

"Increasing China's foreign reserves will give more ammunition to defend the currency if the market situation eventually necessitates it."

China's onshore yuan traded at 7.3318 per dollar as of 0450 GMT on Monday, not far from a 16-month low of 7.3328 hit on Friday.

It has lost more than 3% to the dollar since the US election in early November, on worries that Trump's threats of fresh trade tariffs will heap more pressure on the struggling Chinese economy.

The central bank has been setting its official midpoint guidance on the firmer side of market projections since mid-November, which analysts say is a sign of unease over the yuan's decline.

Monday's announcements underscore the PBOC's challenges and its juggling act as it seeks to revive economic growth by keeping cash conditions easy, while also trying to douse a runaway bond rally and simultaneously stabilize the currency amid political and economic uncertainty.

It has in recent days unveiled other measures. In efforts to prevent yields from falling too much and to control circulation of yuan offshore, it said it is suspending treasury bond purchases but plans to issue huge amounts of bills in Hong Kong.

Gary Ng, senior economist at Natixis, said while China's onshore market has a much better pool of yuan deposits, Hong Kong plays a "significant role with higher turnover driven by FX swaps and spot transactions."

"This means that Hong Kong can be a venue for supporting the yuan through trading activities and potential investments."

Data on Monday showed China's exports gained momentum in December, with imports also showing recovery, although the export spike at the year-end was in part fueled by factories rushing inventory overseas as they braced for increased trade risks under a Trump presidency.