What to know about Silicon Valley Bank and bank runs
A day after Silicon Valley Bank saw its shares drop 60% on Thursday, and experienced a bank run, U.S. regulators took control, freezing withdrawals and temporarily shuttering its branches.
Why it matters: SVB is the second largest federally insured bank failure since Washington Mutual in 2008. It's not clear yet how far-reaching the financial consequences will be.
What is SVB?
SVB is the country's 16th largest bank one of the most popular financial institutions among tech and life sciences startups, doing business with nearly half of all U.S. venture capital-backed startups.
Catch up quick: On Thursday, SVB announced a $1.25 billion common stock sale, plus another $500 million of depository shares. It also said private equity firm General Atlantic is buying $500 million of common stock in a separate transaction.
- The plan didn't impress traders, which led to the 60% drop in SVB's share value.
- Then came the bank run, triggering the meltdown of SVB and shocking Silicon Valley.
What is a bank run?
Banks exist on the collective belief that when you put money in, the bank will still be there — along with your money — tomorrow.
- When enough investors start withdrawing out of worry that a bank will run out of money, it can cause others to scramble to withdraw their funds. Bank runs are triggered by fear, and fear is bad for business.
- Everyone seeking to withdraw all at once can cause a bank to fail, because not all of the money is actually in the bank in the first place.
- What begins mostly as fear of bank insolvency becomes real insolvency, because no one wants to be last in line to get their cash.
What happens when a bank fails?
Federal Deposit Insurance Corp. (FDIC) was created in 1933 to address the waves of bank runs in the U.S. following the 1929 stock market crash. The goal was to make banks more stable and ease fears of being able to access one's account.
- It's an independent federal agency that insures banks' deposits up to $250,000 per depositor, which means that if your FDIC-insured bank fails, you can safely access up to a quarter million dollars of your money there.
- The FDIC also acts as the receiver of the failed bank, effectively taking control of the bank, as happened with SVB Friday morning. It has assured depositors they will have full access to their funds.
- More than 93% of SVB's $161 billion in deposits were not insured. What happens to that money is not yet clear.
- The best-case scenario is that another financial institution agrees to buy SVB soon, which would likely facilitate the reopening of client accounts and calm investors, Axios' Dan Primack writes.
- In its statement, the FDIC said only that those in excess of $250,000 will receive "an advance dividend within the next week."
- If SVB is still under control of the government on Monday, all eyes then would turn to the FDIC, to see if the "advance dividends" will be sufficient to cover expenses.
Our thought bubble, via Primack: This weekend is key to determining if the situation escalates from an inconvenience to a crisis for SVB clients, most of which are businesses that need to meet payroll.