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Silicon Valley bank crash: Fears of a financial crisis after bank used by US tech sector fails

origin 1Santa Clara Police officers exit the Silicon Valley Bank headquarters in Santa Clara, Calif. on Friday, March 10, 2023, after it collapsed. ©Jeff Chiu/AP

U.S. regulators rushed to seize the assets of Silicon Valley Bank (SVB) on Friday after a run on the bank, the biggest bust by a financial institution since the height of the financial crisis more than a decade ago.

Silicon Valley, the country’s 16th-largest bank, went bankrupt after depositors – mostly tech workers and venture capital-backed companies – rushed to withdraw their money this week as anxiety mounted over the situation of the bank.

The bank could no longer cope with its customers’ massive withdrawals, and its last attempts to raise new money were unsuccessful.

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The US authorities then officially took possession of the bank and entrusted its management to the US agency in charge of guaranteeing deposits, the Federal Deposit Insurance Corporation (FDIC).

Little known to the general public, SVB had specialized in financing start-ups and had become one of the largest banks in the United States by asset size: at the end of 2022 it had 209 billion dollars (196 billion euros) of assets and about 175 .4 billion dollars (164.5 billion euros) of deposits.

Growing anxiety among tech workers

His disappearance represents not only the largest bank failure since Washington Mutual in 2008, but also the second largest retail bank failure in the United States.

U.S. Treasury Secretary Janet Yellen summoned several financial sector regulators on Friday to discuss the situation, reminding them that she has “full confidence” in their ability to take appropriate action and that the banking sector has remained “resilient.”

Outside the bank’s Santa Clara California headquarters on Friday, nervous customers wondered how they could access their funds, some trying to guess what was going on through the closed glass doors.

Up front, an FDIC piece of paper said they could, as of Monday, withdraw up to $250,000 (€235,000).

“This is no good. Much bigger [venture capitalists] they have very high deposits here,” noted a client who declined to give his name. Head of a start-up, he used the bank to pay his employees and is worried about them.

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The panic movement on the markets started on Thursday, after the SVB had announced that it wanted to raise capital quickly to meet the massive withdrawals of its customers, without succeeding and having sold for 21 billion dollars (19.7 billion euros) financial stocks, losing $1.8 billion (€1.7 billion) in the process.

The announcement surprised investors and rekindled fears about the solidity of the entire banking sector, especially with the rapid increase in interest rates, which is lowering the value of bonds in the portfolio and increasing the cost of credit.

The four biggest US banks lost $52 billion (49 billion euros) on the stock exchange Thursday and in their wake, Asian and then European banks failed.

Ripple effect outside the US

In Paris, Société Générale lost 4.49%, BNP Paribas 3.82% and Crédit Agricole 2.48%. Elsewhere in Europe, German bank Deutsche Bank lost 7.35%, UK bank Barclays 4.09% and Switzerland’s UBS 4.53%.

On Wall Street, the big banks recovered on Friday after the previous day’s defeat: JPMorgan Chase took 2.54 percent while Bank of America and Citigroup lost less than 1 percent.

Mid-sized or more customer-focused banks, on the other hand, faced more turmoil, with First Republic, for example, losing nearly 15% and Signature Bank, close to the cryptocurrency scene, declining by 23%.

“As is often the case in finance, the problem didn’t come from where we expected,” says CFRA’s Alexander Yokum.

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“Many observers wondered about the debt piling up on credit cards or in the office real estate market. A bank run was not expected,” a chain reaction starting with massive withdrawals by customers, he told AFP .

Spi Asset Management analyst Stephen Innes reassures, estimating “low”, in a note, the risk of “a capital or liquidity accident among the big banks”.

After the financial crisis of 2008/2009 and the collapse of the US bank Lehman Brothers, banks had to provide their national and European regulators with reinforced proof of soundness.

For example, they need to justify a higher minimum capital level to absorb any losses.

For Morgan Stanley analysts, “the funding pressures facing the SVB are truly unique” and other banks are not facing a “liquidity crisis”.