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SVB, a 40-year-old bank that's known for handling deposits and loans for thousands of tech startups in Silicon Valley and beyond, fell apart this week and was shut down by regulators in the largest bank failure since the financial crisis. The demise began late Wednesday, when SVB said it was selling $21 billion of securities at a loss and trying to raise money. It turned into an all-out panic by late Thursday, with the stock down 60% and tech executives racing to pull their funds.
While bank failures aren't entirely uncommon, SVB is a unique beast. It was the 16th biggest bank by assets at the end of 2022, according to the Federal Reserve, with $209 billion in assets and over $175 billion in deposits.
The Federal Deposit Insurance Corporation, which became the receiver of SVB, insures $250,000 of deposits per client. Because SVB serves mostly businesses, those limits don't mean much. As of December, roughly 95% of SVB's deposits were uninsured, according to filings with the SEC.
But the process is much more convoluted for uninsured depositors. They'll receive a dividend within a week covering an undetermined amount of their money and a "receivership certificate for the remaining amount of their uninsured funds."
One founder, who asked to remain anonymous, told CNBC that everyone is scrambling. He said he's spoken with more than 30 other founders, and talked to a finance chief from a billion-dollar startup who has tried to move more than $45 million out of SVB to no avail. Another company with 250 employees told him that SVB has "all our cash."
For the FDIC, the immediate goal is to quell fears of systemic risk to the banking system, said Mark Wiliams, who teaches finance at Boston University. Williams is quite familiar with the topic as well as the history of SVB. He used to work as a bank regulator in San Francisco.
Treasury Secretary Janet Yellen on Friday met with leaders from the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency regarding the SVB meltdown. The Treasury Department said in a readout that Yellen "expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient and regulators have effective tools to address this type of event."
SVB's rapid failure could also serve as a wakeup call to regulators when it comes to dealing with banks that are heavily concentrated in a particular industry, Williams said. He said that SVB has always been overexposed to tech even though it managed to survive the dot-com crash and financial crisis.
Rather than sticking with SVB, startups saw the news as troublesome and decided to rush for the exits, a swarm that gained strength as VCs instructed portfolio companies to get their money out. Williams said SVB's risk profile was always a concern.
While large caps have more cash reserves and are more likely to have insured deposits and FDA-approved product revenues to fall back upon, companies that seek to partner with smaller biotech companies will need to be more strategic with financial allocation.
The S&P 500 component weights are listed from largest to smallest. Data for each company in the list is updated after each trading day. The S&P 500 index consists of most but not all of the largest companies in the United States. The S&P market cap is 70 to 80% of the total US stock market capitalization. It is a commonly used benchmark for stock portfolio performance in America and abroad. Beating the performance of the S&P with less risk is the goal of nearly every portfolio manager, hedge fund and private investor.
Founders Fund, the venture capital fund co-founded by Peter Thiel, has advised companies to pull money from Silicon Valley Bank amid concerns about its financial stability, according to people familiar with the situation.
Customers of SVB were withdrawing their deposits beyond what it could pay using its cash reserves, and so to help meet its obligations the bank decided to sell $21 billion of its securities portfolio at a loss of $1.8 billion. The drain on equity capital led the lender to try to raise over $2 billion in new capital.
However, like a traditional bank, certain PayPal and Venmo deposits do qualify for Federal Deposit Insurance Corp. (FDIC) protection known as pass-through insurance. This happens when PayPal or Venmo deposits funds on users' behalf with three FDIC-insured banks -- The Bancorp (TBBK -2.37%), Goldman Sachs (GS 0.56%), or Wells Fargo (WFC 0.38%). PayPal Debit Mastercard holders, users who have signed up for direct deposit into PayPal or Venmo, and cryptocurrency buyers using PayPal or Venmo qualify for this FDIC pass-through insurance. Cryptocurrency holdings and non-U.S. dollar balances do not qualify for FDIC pass-through insurance. This insurance offers no protection against the failure of PayPal or Venmo, however.
However, even short-maturity assets such as bonds and other fixed-income assets need to be sold before money is sent to a customer requesting a withdrawal. Though these are highly liquid, it still takes time to sell these assets on the market. Thus, too many withdrawal requests all at once could cause problems. PayPal disclosed that over $17 billion of funds receivable and customer funds were invested in short-term available-for-sale debt securities at the end of 2022.
Block's customer balances were significantly less than PayPal's at the end of 2022. It reported $3.18 billion in customer funds, and $1.75 billion of it was designated as cash, with the rest invested in money market and other short-term cash equivalents.
The Dow Jones Industrial Average reversed higher Monday, as global markets grappled with the ongoing crisis among U.S. banks. The FDIC and other financial regulators guaranteed all deposits of SVB Financial (SIVB). Regulators on Sunday also took control of Signature Bank (SBNY). Meanwhile, San Francisco's First Republic (FRC) crashed 77% in morning trade, despite receiving additional funding from the Federal Reserve and JPMorgan (JPM). Finally, Charles Schwab (SCHW) plunged 20% amid ongoing banking fears.
On the economic front, eyes will be on the consumer price index on Tuesday. The CPI is expected to rise 0.4%, both overall and excluding food and energy. That would bring the headline CPI inflation rate down to 6% from 6.1% in January, with the core inflation rate easing to 5.5% from 5.6%.
After Monday's market open, the Dow Jones Industrial Average rose 0.15%, and the S&P 500 was down 0.1%. The tech-heavy Nasdaq composite rose 0.4% in morning action, with Seagen and Illumina leading the index.
On Friday, the stock market sold off sharply, as the major stock index ended with big losses. The Dow Jones Industrial Average dropped 1.1%, and the S&P 500 declined 1.45%. The tech-heavy Nasdaq tumbled 1.8%.
In recent weeks, Dow Jones leader Salesforce showed big upside strength after strong fourth-quarter results. But those gains have mostly disappeared amid the recent market weakness, and now the stock is back below a 178.94 cup-with-handle entry. Still, the stock's recent strength is a reason to monitor the software leader in the coming sessions. CRM stock rose 0.5% Monday.
IBD Leaderboard watchlist stock Palo Alto Networks continues to trade quietly in a handle after the stock's 12.5% surge on Feb. 22. Shares remain within striking distance of a base's 192.94 buy point. Bullishly, the stock's relative strength line is at new highs, as the stock sharply outperforms the market averages. PANW stock traded down 0.8% Monday morning.
Recent IBD Stock Of The Day, New Relic, is working on a flat base with a 80.98 buy point in the aftermath of the Feb. 8 earnings-fueled surge. The RS line is holding up for now. NEWR stock was down 1.6% Monday.
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