On Friday, regulators took swift action to seize the assets of a prominent bank in Silicon Valley, which constitutes the largest failure of a U.S. financial institution in almost 15 years, since the height of the financial crisis. The bank in question, Silicon Valley Bank, is ranked as the 16th largest in the nation.

Its failure followed a wave of depositors withdrawing their funds in response to concerns about the bank’s stability. This event marks the second-largest bank failure in U.S. history, following the 2008 collapse of Washington Mutual.

The bank primarily catered to technology professionals and venture capital-supported businesses, including several of the industry’s most prominent brands.

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The expert’s opinion:

According to Garry Tan, CEO of Y Combinator, an incubator for startups that has introduced hundreds of entrepreneurs to the bank and facilitated the launch of companies such as DoorDash, Airbnb, and Dropbox, this is a catastrophic occurrence for startups. He further stated, “I have personally received countless requests from our founders seeking guidance on how to navigate this crisis. Many of them are wondering if they need to put their employees on furlough.”

It seems unlikely that the turmoil will spread throughout the wider banking industry, as it did in the months preceding the Great Recession. The largest banks, which pose the greatest risk of triggering an economic crisis, have strong financial foundations and ample capital.

As per the bank’s website and USA news, almost 50% of the technology and healthcare corporations in the United States that went public last year and received initial funding from venture capital companies were clients of Silicon Valley Bank.

Additionally, the bank prided itself on its affiliations with renowned technology enterprises such as Shopify and ZipRecruiter, as well as one of the premier venture capital companies, Andreessen Horowitz.

The company that faced losses:

Roku, the online TV streaming platform, was one of the companies affected by the bank’s failure. In a filing with regulators on Friday, Roku disclosed that approximately $487 million, which accounted for 26% of its cash reserves, was held at Silicon Valley Bank.

As a consequence of the seizure, the California banking authorities and the FDIC transferred the bank’s assets to a newly established organization known as the Deposit Insurance Bank of Santa Clara. Beginning on Monday, the new bank will initiate the payment of insured deposits. Following that, the FDIC and the California regulators aim to liquidate the remaining assets to reimburse other depositors.

There had been an atmosphere of apprehension in the banking industry throughout the week, with stocks plummeting by more than 10%. However, on Friday, after news broke of Silicon Valley Bank’s predicament, shares of nearly all financial institutions suffered further declines.

The bank’s collapse occurred unexpectedly and rapidly. On Friday, certain analysts in the industry opined that the bank was still a sound enterprise and a prudent investment. At the same time, executives at Silicon Valley Bank were endeavoring to secure additional investors and raise capital. Despite their efforts, trading in the bank’s shares was suspended before the stock market’s opening due to excessive volatility.

The FDIC decided to close the bank shortly before midday, which is an unusual move since such actions typically occur at the end of business hours. The fact that the FDIC was unable to identify a buyer for the bank’s assets immediately is indicative of how rapidly depositors withdrew their funds.

The administration assured the public that the banking sector is much stronger than it was during the Great Recession and stated that Treasury Secretary Janet Yellen was closely monitoring the situation.

Conclusion:

When the Fed increases its benchmark interest rate, the worth of generally reliable bonds decreases. This is usually not a significant concern; however, when depositors become nervous and commence withdrawing their funds, USA news highlighted that banks may have to sell those bonds before their maturity dates to offset the outflow of funds.