Silicon Valley Bank (NASDAQ: SIVB) as the name suggests is a go-to bank for technology startups, venture capital firms, and institutional investors focused on the tech sector. It is the biggest bank in the Silicon Valley region based on deposits. However, this bank is not in the news now for a good reason; it is facing a liquidity shortfall that has forced it to scramble to raise extra capital.

• Silicon Valley Bank has announced a $1.75bn share offering intended to raise money to shore up its balance sheet amid declining deposits from its customers. The bank is selling $1.25bn of common stock and $500mn of depositary shares. Separately, it has signed an agreement to sell $500mn of common stock to General Atlantic, a tech-focused private equity firm.

• The emergency share sale announcement spooked Silicon Valley Bank’s investors; Its share price sunk by 60% on Thursday alone and over 40% during pre-market trading on Friday.

Why Is Silicon Valley Bank Having Problems With Liquidity?

During the recent tech boom, startups and established technology companies alike were flush with funding, with a great deal of it deposited with Silicon Valley Bank. The bank used those deposits to acquire long-dated securities such as U.S. Treasuries, which are typically safe but are now worth less than their purchase value because the U.S. Federal Reserve raised interest rates.

Silicon Valley Bank announced that it sold $21bn of securities to boost short-term liquidity, but lost $1.8bn on the hastened sale. It also borrowed $15bn and is holding the emergency equity sale to shore up its balance sheet.

What Is the Effect Of Silicon Valley Bank’s Announcement?

Remember that a major cause of Silicon Valley Bank’s woes was declining customer deposits as startup funding witnessed a historic decline lately. The emergency equity sale has made matters worse. Customers are having doubts about the bank’s financial health and have begun transferring their funds out at a high rate; reports indicate that several prominent venture capital firms have advised their portfolio startups to pull out their deposits as a precaution.

Meanwhile, Silicon Valley Bank’s Chief Executive, Greg Becker, has tried to assuage customer concerns. “We believe we have the right strategy, a strong foundation, and a proven, recession-tested management team to successfully navigate this market cycle,” he wrote in a letter addressed to investors on Thursday.

Is This a Bank Run?

• A bank run is a situation where too many depositors rush to withdraw their cash from a bank simultaneously, and the bank can’t afford to redeem them all (deposits are invested in securities or loaned out such that a bank can’t retrieve them all at short notice without incurring losses).

At this point, Silicon Valley Bank is not experiencing a bank run. Deposits are going out at an unusually high rate but not at a rate at which the bank doesn’t have enough liquidity to cover them. In a worst-case scenario where the bank does not have sufficient liquidity, regulators would likely swoop in to sell it to a larger rival that will assume customer deposits.

For reference, the last U.S. bank failure was in October 2020 when Almena State Bank of Kansas shut down. It was quickly taken over by another bank, Equity Bank, that assumed customer deposits. Silicon Valley Bank is a top-30 U.S. bank by deposits, so even has a lesser chance of failure without government intervention to sort out a plan that keeps customer deposits intact.

• This week is a peculiar one in the banking sector. On Thursday, a U.S. bank called Silvergate Bank announced plans to shut down and return deposits after heavy financial losses. This bank primarily catered to cryptocurrency companies that rushed to pull out deposits after the implosion of FTX, a popular crypto exchange.

• Silicon Valley Bank’s troubles had nothing to do with cryptocurrency but instead with the increase of interest rates by the U.S. Federal Reserve. The economy is one big machine that no one seemingly understands, just like the human brain, but we can observe the effects and gasp in response.

Update: The Federal Deposit Insurance Commission (FDIC) has taken over Silicon Valley Bank. The government agency has created a new bank called the Deposit Insurance National Bank of Santa Clara (DINB) and transferred all insured deposits (of up to $250,000) from Silicon Valley Bank to the newly formed bank under its control.

Uninsured depositors with funds in excess of $250,000 will get a receivership certificate for the remaining amount of their funds. The FDIC will sell the assets of Silicon Valley Bank and use the proceeds to sort out uninsured deposits.

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