The US banking regulator takes over the Silicon Valley Bank

U.S. regulators took over Silicon Valley Bank on Friday after a rush of deposit outflows and a slump in its share price led to uncertainty about the future of the tech-focused lender.

It is the second largest bank failure in US history after the collapse of Washington Mutual in 2008.

Earlier in the day, the bank had abandoned efforts to raise $2.25 billion in new funds.

SVB shares were halted during early trading on New York’s Nasdaq stock exchange as management tried to reassure investors.

Fresh capital from the share sale would have helped bridge the approximately $1.8 billion in losses SVB incurred from the approximately $21 billion worth of securities sales initiated to protect clients to cover who withdrew deposits from the bank.

It planned to sell $1.25 billion of its common stock to investors and an additional $500 million in mandatory convertible preferred stock, which is slightly less dilutive to existing shareholders.

SVB did not immediately respond to a request for comment. Employees were asked by the company on Friday to work from home while the bank’s management team, led by Chief Executive Greg Becker, holds talks over possible next steps, according to two people familiar with the matter.

The Federal Deposit Insurance Institution announced that it would retain all SVB deposits for later disposal. The regulator has tried in the past to merge failed lenders with a larger and more stable institution. For example, Washington Mutual was sold to JPMorgan Chase.

Bank failures in the US have been extremely rare in recent years: there were none in 2020 and 2021, most recently there were more than 10 in 2014.

The banking group’s woes stem from a decision, made at the height of the tech boom, to park $91 billion of its deposits in long-term securities like mortgage bonds and US Treasuries that were considered safe but are now worth $15 billion less than at the SVB, they bought after the Federal Reserve aggressively hiked interest rates.

On Thursday, SVB and its underwriter Goldman Sachs rushed to close the share offering. While Goldman had secured enough interest in the convertible bond deal by afternoon, the common stock sale struggled as SVB shares tumbled, according to a person familiar with the matter.

Private equity firm General Atlantic had committed to providing $500 million in equity if the offering went through. Goldman Sachs briefly worked to bring together a broader group of private equity investors, but that plan never materialized because SVB shares fell so sharply, according to sources briefed on the matter.

Shares of the bank posted their biggest drop ever on Thursday, erasing $9.6 billion from the banking group’s market cap. SVB shares had fallen more than 60 percent in pre-market trading on Friday before the stop was announced.

As of Friday morning, the sale of shares and convertible bonds had been postponed, according to people familiar with the matter.

The effects of the SVB’s problems are being felt widely. The lender is the banking partner for half of US venture-backed technology and life science companies and has a strong presence in offering $10 trillion in lines of credit to the private equity industry.

Its customers had begun to become increasingly anxious about the bank’s financial health, and some startups were worried enough to withdraw their money.

Some venture capital groups told the Financial Times they were concerned about the fall in the value of SVB shares and advised some of their portfolio companies to withdraw some of their deposits from the lender. Others, however, said they wouldn’t give that advice to their portfolio companies.

“SVB’s 40-year relationship in support of Silicon Valley evaporated in 14 hours,” said an executive at a multibillion-dollar venture capital fund. He said his firm warned start-ups it invests in to be “prudent” and not foment a run on the SVB on Thursday.

SVB’s demise, prompted by fears of interest-related losses, has sparked broader contagion in financial stocks and drawn attention to the potential impact that rising interest rates could have on other banks’ net interest income.

The four largest U.S. banks — JPMorgan Chase, Citigroup, Wells Fargo and Bank of America — also lost $52.4 billion in market value in Thursday’s trading.

Some smaller lenders, particularly in California, fell sharply in early Friday trading. PacWest Bancorp fell as much as 25 percent, while First Republic, a SVB competitor, fell more than 40 percent before recouping most of its losses.

Reporting from Eric Platt, Ortenca Aliaj, Antoine Gara and Joshua Franklin in New York and Tabby Kinder and George Hammond in San Francisco. Additional reporting from Brooke Masters and Stephen Gandel in New York

Video: Broken markets: the major threats to the financial system The US banking regulator takes over the Silicon Valley Bank

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