Silicon Valley Bank is seized by U.S. after historic failure

The U.S. rushed to seize the assets of Silicon Valley Bank on Friday after it experienced a run on the bank, the largest failure of a financial institution since Washington Mutual during the height of the financial crisis more than a decade ago.

Silicon Valley, the nation's 16th largest bank, failed after depositors — mostly technology workers and venture capital-backed companies — hurried to withdraw money this week as anxiety over the bank's balance sheet spread. It is the second biggest bank failure in history, behind Washington Mutual.

Silicon Valley — based in Santa Clara, California — was heavily exposed to tech industry. There is little chance of contagion in the banking sector similar to the chaos in the months leading up to the Great Recession more than a decade ago. The biggest banks — those most likely to cause a systemic economic issue — have healthy balance sheets and plenty of capital.

Still, there have been ripple effects on the banking sector whose bond holdings — like Silicon Valley Bank’s — have been affected by the Federal Reserve’s interest-rate hikes.

In Friday trading for Long Island-headquartered banks, New York Community Bancorp dropped 5.99%, First of Long Island Corp. fell 4.40%, Dime Community Bancshares Inc. slipped 2.81% and Flushing Financial Corp. was down 2.56%.

In 2007, the biggest financial crisis since the Great Depression spread across the globe after mortgage-backed securities tied to ill-advised housing loans rippled from the U.S. to Asia and Europe. Because major banks had extensive exposure to one another, it led to cascading disruption throughout the worldwide financial system, putting millions out of work.

Silicon Valley Bank’s failure arrived with incredible speed. Silicon Valley Bank executives were trying to raise capital early Friday and find additional investors. However, trading in the bank’s shares was halted before the opening bell due to extreme volatility.

Shortly before noon eastern, the Federal Deposit Insurance Corp. moved to shutter the bank. The FDIC could not immediately find a buyer for the bank's assets, signaling how fast depositors had cashed out.

The bank had $209 billion in total assets at the time of failure, the FDIC said. It was unclear how much of its deposits were above the $250,000 insurance limit at the moment, but previous regulatory reports showed that much of Silicon Valley Bank's deposits exceeded that limit.

The FDIC said Friday that deposits below the $250,000 limit would be available Monday morning.

Silicon Valley Bank still appeared stable this year, but on Thursday it announced plans to raise up to $1.75 billion in order to strengthen its capital position. That sent investors scurrying and shares plunged 60%. They rocketed lower again Friday before the open of the Nasdaq where it is traded.

. Technology stocks have been hit hard in the past 18 months after a growth surge during the pandemic and layoffs have spread throughout the industry. Silicon Valley's connections to the tech sector became a liability

At the same time, the bank was hit hard by the Federal Reserve's fight against inflation and an aggressive series of interest rate hikes to cool the economy.

As the Fed raises its benchmark interest rate, the value of bonds, typically a stable asset, start to fall.

With Ken Schachter