One of the biggest bank failures in U.S. history occurred on Friday as federal regulators shut down Silicon Valley Bank (SBV), a major lender to the technology industry.
The news sent shockwaves throughout the industry, with SBV's attempts to raise $1.75 billion earlier in the week proving unsuccessful after it suffered nearly $2 billion in losses on its bond portfolio primarily consisting of U.S. Treasuries. On Friday, the FDIC took over as receiver for SVB, and its shares were halted as prices continued to plummet, causing a decline in the broader market, particularly in the bank and financial shares.
Silicon Valley Bank (SVB) experienced a collapse after its customers withdrew deposits exceeding the $250,000 limit guaranteed by the Federal Deposit Insurance Corp (FDIC), leading to a downward spiral of SVB's shares. The event caused concerns that other lenders might have incurred similar losses, leading to a decline in shares of banks and financial companies as SVB tried to prevent collapse.
According to the reports, SVB suffered losses of almost $2 billion from the sale of U.S. bonds purchased before the Federal Reserve started raising interest rates a year ago. Higher yields caused bond prices to decrease, which isn't certain whether other large banks may also experience similar losses.
In an attempt to recover from the loss of about $1.8 billion from the sale of a $21 billion portfolio of U.S. Treasuries, SVB announced a stock sale on Wednesday. The bank executives stated in an investor letter that they had sold almost all the bank's liquid assets.
The Federal Reserve's year-long efforts to raise interest rates have allowed many banks to increase their loan charges, thereby enhancing their profits. However, Silicon Valley Bank's collapse highlights the potential negative impact of higher rates, such as significant losses from the sale of Treasuries, as their prices have plummeted.
