…the Second Largest Bank Failure in U.S. History.
…consequences for Worried Nigerian Banks’ Customers
posted March 13, 2023
On Wednesday, the United States Silicon Valley Bank (SVB), a well-capitalized institution seeking to raise some funds to expand its operations.
But within 48 hours, a panic induced by the very venture capital and tech community that SVB had served and nurtured ended the bank’s 40-year run.
A quick timeline indicated the following blow-by-blow account:
• The company’s downward spiral began late Wednesday when it surprised investors with news that it needed to raise $2.25 billion to shore up its balance sheet.
• “This was a hysteria-induced bank run caused by VCs,” Ryan Falvey, a fintech investor of Restive Ventures, told CNBC.
• All told, customers withdrew a staggering $42 billion of deposits by the end of Thursday, according to a California regulatory filing.
• Now, those who remained with SVB face an uncertain timeline for retrieving their money.
Sensing a financial earthquake, Regulators promptly pounced on SVB Friday and seized its deposits in the largest U.S. banking failure since the 2008 financial crisis and the second-largest ever.
The company’s downward spiral began late Wednesday when it surprised investors with news that it needed to raise $2.25 bn to shore up its balance sheet. What followed was the rapid collapse of a highly-respected bank that had grown alongside its venture capital and technology clients.
As worried analysts begin to rummage through the rumbles on the second bank wind-down announced by the California Regulators and the Federal Deposit Insurance Corporation (FDIC) last week, several commentators are lamenting the role that other investors played in SVB’s demise.
“This was a hysteria-induced bank run caused by VCs,” Ryan Falvey, a fintech investor at Restive Ventures, told CNBC. “This is going to go down as one of the ultimate cases of an industry cutting its nose off to spite its face” and a direct fallout from the Federal Reserve’s inaction to stem inflation amidst an aggressive campaign to hike interests in the last few years.
The ramifications of this tragedy could be far-reaching, with concerns that startups may not be able to pay their employees in the coming days, as venture investors may struggle to raise funds, which may put another nail in the coffin of an already-battered sector.
The FDIC only insures deposits of up to $250,000 per account, analysts have said that a number of firms and wealthy investors had far more than the insured amount tied up in SVB. There have been concerns that workers at some tech companies and startups will not see their paychecks now.
However, no matter how one looks at it, it’s a sign that another ghost of past economic woes of the US economy appeared on Friday afternoon with the seizure of assets held by Silicon Valley Bank by California regulators and the Federal Deposit Insurance Corporation (FDIC) promptly appointing a receiver, in what is now the largest bank failure to take place since the financial crisis of 2008 — as well as the second-largest bank failure in U.S. history. The largest was the 2008’s failure of Washington Mutual.
The California Department of Financial Protection and Innovation (DFPI) cited “inadequate liquidity and insolvency” for its decision to take possession of Silicon Valley Bank — the 16th largest bank in America — and its roughly $209 billion in total assets and total deposits of approximately $175.4 billion.
ABC News explained that Silicon Valley Bank “was heavily exposed” to the tech industry, adding “there is little chance of contagion in the banking sector as there was in the months leading up to the Great Recession,” but there have been signs that other banks are having some issues with the liquidity of late.
More, via ABC News:
The FDIC ordered the closure of Silicon Valley Bank and immediately took the position of all deposits at the bank Friday. The bank had $209 billion in assets and $175.4 billion in deposits at the time of failure, the FDIC said in a statement. It was unclear how much of the deposits was above the $250,000 insurance limit at the moment.
Notably, the FDIC did not announce a buyer of Silicon Valley’s assets, which is typically when there’s an orderly wind-down of a bank. The FDIC also seized the bank’s assets in the middle of the business day, a sign of how dire the situation had become.
Dire indeed, and things aren’t looking great for banks, in general, this week as their stocks tumble amid a sharp selloff. Thursday saw the Dow Jones Industrial Average dump more than 500 points amid a “collapse” in bank stocks, as Forbes described things. By Friday afternoon, following the failure of Silicon Valley Bank, the Dow was down more than 250 points and Thursday’s selloff caused global markets to sink.
As CNN Business explained, some of the banks’ issues come as a result of the Federal Reserve’s aggressive interest rate hikes undertaken in the last 12 months. “On the one hand, high-interest rates have been a boon for banks, helping them make heftier returns on loans to households and businesses, and as savers deposit more of their money into savings accounts,” the report noted.
“But, on the other, some large banks that had scooped up expensive Treasuries and other bonds when interest rates were very low, are sitting on losses as borrowing costs have risen and bond prices have gone down.” Hence some of this week’s mess. “Banks heavily exposed to the tech sector, like SVB, are particularly at risk as cash-hungry startups withdraw their deposits,” CNN Business added.
The US Treasury Secretary Janet Yellen announced during a Sunday interview with CBS News ‘Face the Nation’, that the federal government wouldn’t bail out the now-collapsed Silicon Valley Bank (SVB) but said it will work to aid depositors who are worried about their money.
Back home, the reverberating global effect of the fall should be a concern to Nigerian banks, commented Barrister Mack Ogbamosa, a legal consultant on financial markets development practice.
According to Ogbamosa, “our banks here in Nigeria are already on life-support kind of, with the controversial Naira redesign policy by the Central Bank of Nigeria (CBN), which has brought normal banking operations to a standstill.”
“There’s no cash in the banks for basic transactional activities and with the confusing policy pronouncements from the CBN and the Judiciary, you ask yourself, if a heavily capitalized US bank can collapse in 48 hours, what will happen here where banks are more or less like glorified thrift collection agencies, Ogbamosa retorted?
“Hence, we pray and carefully look at the indicators that crumbled the US bank within a twinkle of an eye. Because many things are going on here that banks and regulators are colluding to hide from the public which is capable of precipitating a free run on the financial markets in second”, warned the legal practitioner.
NOTE: THIS IS A DEVELOPING STORY AND MAY BE UPDATED WITH MORE AGENCY REPORTS.