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The 5 most pressing questions answered about the collapse of Silicon Valley Bank

Measured by sheer speed and violence, Silicon Valley Bank’s stunning crash has floored even those who have experienced decades of ups and downs in the market. On Wednesday, SVB was a 40-year-old Valley institution, quietly (by some estimates) banking half of Valley startups. It was done on Friday, shut down by California regulators. Now startups, VCs and analysts are puzzling how the bank run happened, why no one could stop it and who is at risk next.

How did the Silicon Valley Bank run come about?

SVB Financial, the parent company of the controversial Silicon Valley Bank, shocked many when it announced plans on March 8 to strengthen its financial position. SVB said it sold almost its entire $21 billion securities portfolio at a loss of nearly $2 billion. SVB also said it wanted to raise $2.25 billion by offering $1.75 billion in a share sale. General Atlantic, a private equity firm, also agreed to buy $500 million worth of stock. Goldman Sachs acted as underwriter on the $2.25 billion share sale, but not on the securities portfolio transaction. The $2.25 billion share sale was eventually withdrawn, SVB said in a March 10 statement. Goldman and General Atlantic declined to comment.

The attempted share sales startled the corporate community, with several funds withdrawing their money from the SVB. For example, Peter Thiel’s Founders Fund, Union Square Ventures and Coatue Management told their companies to get their money from SVB to avoid getting caught up in a potential bank failure, CNBC reported. Investors and depositors eventually raised $42 billion in deposits from the SVB, leaving the bank with a negative cash balance of about $958 million on March 9, according to a March 10 filing from the Commissioner of Financial Protection and Innovation. SVB shares plunged 60% to close at $106.04 on Thursday. Founders Fund and Union Square did not return messages for comment. Coatue declined to comment. SVB has not returned messages for comment.

On Friday it was rumored that SVB was looking for a buyer. However, large banks were not expected to be interested in SVB due to its loan portfolio, which has a strong leaning towards venture capital. Venture or private equity funds made up about 56% of the global banking portfolio by 2022, according to the company’s 2022 annual report. Fortune reported.

The California Department of Financial Protection and Innovation then closed the SVB on Friday and appointed Federal Deposit Insurance Corp. as trustee. The FDIC created the Deposit Insurance National Bank of Santa Clara, a temporary bank. As trustee, the FDIC will dispose of the SVB’s assets, according to a statement. The Nasdaq, which treats an FDIC receivership as the functional equivalent of bankruptcy, halted shares of SVB on Friday.

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As of December 31, SVB had $209 billion in assets, according to the FDIC. This means that SVB is the largest bank failure since 2008, when Washington Mutual collapsed with $307 billion in assets. JPMorgan eventually bought WaMu for $1.9 billion. SVB was still looking for a rescuer on Friday afternoon. A deal may involve selling the company’s assets piecemeal or in its entirety, Bloomberg reported. The goal is to close a deal on Monday, according to the story.

Why did no one step in to save Silicon Valley Bank?

Late Thursday and Friday morning there were rumors that a white knight might step in to take over SVB, making it a Merrill Lynch rather than a Lehman moment. At best, it looks like SVB could become a Washington Mutual again. It was expected that several banks would be interested in SVB. “SVB has a great balance sheet. Just a sh***y situation with a run,” said a venture capital manager. The top buyer is JPMorgan, one of the world’s largest banks that has bought up fintechs, according to three banks and VC executives. Other potential bidders included Citi and Wells Fargo, the people said. But a buyer from Friday was yet to come. [SVB]. Too much bad debt exposure to the VC world,” one of the bankers told me Fortune.

It’s 2023. Don’t regulators have a way to stop bank runs?

While you might assume there is an AI bot that can stop modern bank runs, some argue that the opposite is true: digital ATM withdrawal portals and social media to stir up the panic may have made things worse. During most previous bank runs, depositors at least had to show up in person (or call later) to ask for their money back, which lengthened the process somewhat.

And yes, there are tons of laws governing banks, along with 50 state agencies and several federal agencies. Then there’s the FDIC, which was created in 1933 to insure deposits in U.S. banks and thrifts (up to $250,000 per account holder) in the event of bank failures. But the main way regulators try to prevent bank runs is for they happen. And there will also be a lot of questions about the Dodd-Frank Wall Street Reform and Consumer Protection Act, a law passed after the 2008 financial crisis to prevent excessive risk-taking that led to blowouts like Lehman Brothers and Washington Mutual . Dodd-Frank was introduced to guard against an SVB-type blowout. But the blame for this may lie with the small banks themselves, which complained after Dodd-Frank went into effect that the stricter rules were prohibitively expensive for them, according to a report from the Federal Reserve Bank of Philadelphia. In 2018, President Donald Trump signed into law a bill that raised the threshold for when companies qualify as a “systemically important financial institution,” or SIFI, meaning the bank would be subject to annual stress testing and other regulatory requirements, to $250 billion in assets of $ 50 billion in assets. Greg Becker, the CEO of SVB, urged the government in 2015 to raise the threshold, arguing that otherwise it would lead to higher costs for customers and “hamper our ability to extend credit to our customers”. Bloomberg reported. SVB had about $212 billion in total assets as of December 2022, up from $56.9 billion at the end of 2018, meaning it was exempt from the more stringent regulations.

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Then there are the Basel Accords, an international regulatory framework designed to ensure banks maintain sufficient cash reserves to meet their financial obligations and survive financial and economic difficulties, according to the Corporate Financial Institute. In September 2022, the Federal Reserve reaffirmed its commitment to Basel III standards, which required banks to maintain significantly higher capitalization levels and broader liquidity buffers, according to a PwC report. European banks were required to implement Basel III, but only the largest US banks were subject to full Basel NSFR requirements, according to the Financial Times. SVB did not have to comply with Basel III. The bank said in its most recent 10K filing, “Because we are a Category IV organization with less than $250 billion in average total consolidated assets, less than $50 billion in average weighted short-term funding, and less than $75 billion in cross-jurisdictional activity. , we are not currently subject to the Federal Reserve’s LCR or NSFR requirements, either in full or reduced.”

Academic journals are full of articles about how the system can better protect against bank runs. But overall, the political conversation seems to go back and forth between ‘we need more regulation’ and ‘regulation is too costly and hinders competitiveness’.

What can depositors get back from Silicon Valley banks?

According to the Wall Street Journal, nearly all or 89% of the SVB’s liabilities are deposits. This is higher than some larger banks, such as Bank of America, where 69% of its liabilities are deposits. Due to the lack of IPOs, SVB clients received no new money from public offerings or fundraising Wall Street Journal said. Total deposits fell nearly 9% to $173.1 billion by the end of 2022, according to the SVB’s annual report.

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The FDIC said Friday that all insured depositors will have full access to their insured deposits by Monday morning, March 13. However, most SVB deposits are uninsured. (According to the SVB’s 2022 annual report, as of Dec. 31, the bank reported $173.1 billion in total deposits. About $151.5 billion, or 88% of total deposits, was uninsured.) FDIC said it will reduce uninsured depositors within the next few months. week. They will also receive a moratorium on the remaining amount of their uninsured funds. Uninsured depositors may also receive future dividend payments as the FDIC sells SVB assets, the statement said.

Who else is at risk?

As during the financial crisis in 2008, there is a sense that many more shoes will fall as the contagion of SVB spreads.

The collapse of the SVB affected other banks on Friday, while many larger institutions, whose deposits are more diversified, were unscathed. Shares of First Republic Bank, a banking and wealth company with $212.6 billion in total bank assets as of Dec. 31, fell nearly 15% on Friday, while Western Alliance Bancorp, a regional bank holding company with more than $65 billion in assets, fell on Friday. December 21 plummeted. %. Both banks tried to appease investors on Friday by saying their liquidity and deposits remained strong. In contrast, shares of JPMorgan rose more than 3% to close at $133.65, while Bank of America lost 27 cents to $30.27 and Wells Fargo added 23 cents to finish at $41.36 Friday.

One consequence of the SVB implosion is its impact on startups that have their assets or deposits with the bank, according to Dan Dolev, a senior analyst in fintech equity research at Mizuho Securities USA. “We don’t know the exposure of some of the startups,” Dolev said. Etsy, Roku, and Roblox are just a few of the companies that have already warned about exposure to SVB.

But as we will see in the coming days and weeks, they certainly won’t be the last.

This story was originally on Fortune.com

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