Silicon Valley Bank fallout fears grow as regulators urged to find a buyer

New York — Some financial industry executives and investors are growing increasingly concerned that the collapse of Silicon Valley Bank (SVB) could have a domino effect on other US regional banks if regulators did not find a buyer to protect uninsured deposits.

SVB Financial Group, a lender mainly to start-ups, on Friday became the largest bank to fail since the 2008 financial crisis, roiling markets and leaving billions of dollars belonging to companies and investors stranded.

The Federal Deposit Insurance Corporation (FDIC), which was appointed receiver, was trying to find another bank over the weekend that was willing to merge with Silicon Valley Bank, people familiar with the matter said.

Some industry executives said such a deal would be sizeable for any bank and would likely require regulators to give special guarantees and make other allowances for any buyer.

With $209bn in assets, the Californian-based lender was the 16th-largest US bank, making the list of potential buyers that could pull off a deal relatively short, they said on condition of anonymity because the situation is in flux.

The US Federal Reserve and the FDIC were weighing the creation of a fund that would allow regulators to backstop more deposits at banks that run into trouble, Bloomberg reported. Regulators discussed the new special vehicle in conversations with banking executives and hoped such a measure would reassure depositors and help contain any panic, the report said.

However, it was not clear if regulators would have political support to throw a lifeline to the bank, which catered to Silicon Valley start-ups and investors.

The Fed and FDIC did not immediately respond to a request for comment.

The White House said President Joe Biden had spoken with California governor Gavin Newsom about the bank and efforts to address the situation. “Everyone is working with FDIC to stabilise the situation as quickly as possible,” Newsom said.

Spotlight on other banks

Some analysts and prominent investors warned that without a resolution by Monday, other banks could come under pressure.

“The good news is it is unlikely an SVB-style bankruptcy will extend to the large banks,” risk and financial advisory firm Kroll said in a research note.

However, small community banks could face issues and the risk is “much higher if uninsured depositors of SVB aren’t made whole and have to take a haircut on their deposits”, Kroll added.

Silicon Valley Bank had an unusually high level of deposits that were not covered by the FDIC’s guarantees, which are capped at $250,000.

Billionaire hedge fund manager Bill Ackman said in a tweet that failure to protect all depositors could lead to the withdrawal of uninsured deposits from other institutions as well. “These withdrawals will drain liquidity from community, regional and other banks and begin the destruction of these important institutions,” he warned.

Kyle Bass, founder and chief investment officer of Hayman Capital Management, said the Fed needed to “arrange a marriage” for SVB by Sunday evening, before markets opened in Asia.

“And they’ve got to assure depositors that they will be paid in full because of this merger, and restore stability in the banking system,” he added.

Regional and smaller bank shares were hit hard on Friday. The S&P 500 regional banks index dropped 4.3%, bringing its loss for the week to 18%, its worst week since 2009.

Signature Bank dropped about 23%, while San Francisco-based First Republic Bank fell 15%. Western Alliance Bancorp tumbled 21% and PacWest Bancorp dropped 38% after those stocks were halted several times due to volatility. Charles Schwab Corporation slumped more than 11%.

Signature Bank, First Republic Bank, PacWest Bank and Charles Schwab did not immediately respond to requests for comment. Western Alliance Bank declined to comment.

Some banks could look to preemptively raise capital to fortify their balance sheets or try to strike deals of their own, industry executives said.

When IndyMac and Washington Mutual collapsed in 2008, the FDIC found other firms to take on the assets and keep deposits intact. If no buyer is found for SVB, uninsured depositors will probably be left with a portion of whatever funds the FDIC can raise selling off the bank's assets.

Global dominoes

In the UK, where SVB has a local subsidiary, chancellor Jeremy Hunt said he was working with Prime Minister Rishi Sunak and the Bank of England to “avoid or minimise damage” resulting from the chaos that has engulfed the lender.

“We’ve been working at pace over the weekend, through the night,” Hunt told Sky News. “We will bring forward very soon plans to make sure people are able to meet their cash flow requirements to pay their staff.”

More than 250 UK tech firm executives signed a letter addressed to Hunt on Saturday calling for government intervention, a copy seen by Reuters shows.

Advisory firm Rothschild & Co is exploring options for Silicon Valley Bank UK as insolvency looms, two people familiar with the discussions said. The Bank of England has said it is seeking a court order to place the UK arm into an insolvency procedure.

Some experts, however, see the fallout from the latest collapse as limited. “We do not see this as the start of a broader threat to the safety and soundness of the banking system,” TD Cowen analyst Jaret Seiberg said. “Silicon Valley had a unique business model that was less dependent on retail deposits than a traditional bank.”

Reuters