Why did Silicon Valley Bank fail? | US news

The shutdown and takeover of Silicon Valley Bank by regulators on Friday can be traced to the US Federal Reserve raising interest rates and souring the risk appetite of investors.

Here is the sequence of events that led to the failure:

Federal Reserve raises rates

The Federal Reserve has been raising interest rates from their record-low levels since last year in its bid to fight inflation. Investors have less appetite for risk when the money available to them becomes expensive due to the higher rates. This weighed on technology startups – the primary clients of Silicon Valley Bank – because it made their investors more risk-averse.

Some Silicon Valley Bank clients face cash crunch

As higher interest rates caused the market for initial public offerings to shut down for many startups and made private fundraising more costly, some Silicon Valley Bank clients started pulling money out to meet their liquidity needs. This culminated in Silicon Valley Bank looking for ways this week to meet its customers’ withdrawals.

Bank sells bond portfolio at a loss

To fund the redemptions, on Wednesday Silicon Valley Bank sold a $21bn bond portfolio consisting mostly of US Treasuries. The portfolio was yielding it an average 1.79%, far below the current 10-year Treasury yield of about 3.9%. This forced SVB to recognize a $1.8bn loss, which it needed to fill through a capital raise.

SVB announces stock sale

SVB announced on Thursday that it would sell $2.25bn in common equity and preferred convertible stock to fill its funding hole. Its shares ended trading on the day down 60%, as investors fretted that the deposit withdrawals might push it to raise even more capital.

Stock sale collapses

Some SVB clients pulled their money from the bank on the advice of venture capital firms such as Peter Thiel’s Founders Fund, Reuters reported. This spooked investors such as General Atlantic that SVB had lined up for the stock sale, and the capital raising effort collapsed late on Thursday.

SVB goes into receivership

SVB scrambled on Friday to find alternative funding, including through a sale of the company. Later in the day, however, the Federal Deposit Insurance Corporation (FDIC) then announced that SVB was shut down and placed under its receivership. The FDIC added that it would seek to sell SVB’s assets and that future dividend payments may be made to uninsured depositors.

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