A Look at the SVB's Failed Rescue Plan

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According to Axios Markets, on Thursday, Silicon Valley Bank announced a plan to raise $2.25 billion to strengthen its balance sheet. But the plan didn't work as intended. Instead, it precipitated a run on the bank, which led to it being nationalized and run by the FDIC.

The now-defunct capital-raising plan involved issuing two types of stock. The dilution of existing shareholders was uncertain, and the stock price began to drop, leading to worries about the bank's solvency. Deposit holders started to withdraw their funds, causing a bank run, which ultimately led to the bank's failure.

Even though Silicon Valley Bank itself may retain real value, the bank holding company, SVB Financial Group, which has substantial liabilities, could easily be insolvent. As a result, SVB found itself in a "quiet period" during the securities offering, which meant that it couldn't communicate any substantive information to depositors, investors, or the press beyond what was in its SEC filings.

The only real-time information that depositors had about the bank's health was the plummeting share price and the growing number of stories of other depositors pulling their deposits. Moving money to another bank was a cheap option, and many people did it.

The CEO of SVB, Greg Becker, told customers to "stay calm" on a call, but also admitted that they were "starting to panic." This statement had the same effect on the market as it would have on a spouse.

In the end, the share price couldn't find a level at which there was enough buying interest to support the $2.25 billion share sale. Deposits kept flowing out, and eventually, on Friday, Silicon Valley Bank became the largest U.S. bank failure since the global financial crisis.

Although only a small handful of U.S. bank depositors have lost money in a bank failure in living memory, a bank run can be an existential crisis for any bank. And that is precisely what happened to Silicon Valley Bank.



1 Adapted from source: "Axios." Axios, 11 Mar. 2023, www.axios.com/newsletters/axios-markets-e687e09f-fb69-4792-b2cb-0cb80038cccd.html?chunk=1&utm_term=emshare#story1.

2 Photo credit: Adobe Stock

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