By: Alex Crowley
On Friday, March 10, Silicon Valley Bank (“SVB”) collapsed, creating the second largest bank failure in the history of the United States. This occurred due to a litany of factors that resulted in a massive run on SVB deposits. For years, SVB invested in long-term bonds while interest rates were close to zero. The recent rise in interest rates caused the price of those investments to fall dramatically, and on March 8, SVB announced a $1.8 billion after-tax loss related to these investments.
Stock prices for SVB Financial Group, the bank’s parent company, fell in light of this news. Depositors, mostly technology workers and venture-capital backed technology companies, moved quickly to withdraw their money. However, because banks only carry a portion of depositors’ money in cash, they could not meet these withdrawal demands. Depositors could only access up to $250,000 based on their insurance agreement with the bank. News of the bank’s failure to meet withdrawal demands further exacerbated depositors’ concerns and induced a massive run on SVB. The bank lost nearly $160 billion overnight.
Due to the massive risk posed to the financial system if the bank failed, the Federal Deposit Insurance Corporation (“FDIC”) took control of SVB. In an unprecedented move, the FDIC guaranteed all deposits. At the end of the ordeal, SVB lost $209 billion in assets and $175.4 billion in deposits. The fallout from SVB’s failure even caused President Joe Biden to address the situation.
The situation also negatively impacted shareholders of SVB Financial Group. As stock prices plummeted, shareholders lost large portions of their investments in SVB. Chandra Vanipenta, a father of two and employee for a software company, lost his entire $12,000 investment made through his online brokerage account. He claims to have done significant research on the bank prior to making the investment. He reports that none of the bank’s financial reports indicated warnings related to interest rate hikes, even though the Federal Reserve warned banks about that very issue.
Within a week, shareholders filed a class action suit against SVB Financial Group, CEO Greg Becker, and CFO Daniel Beck in the U.S. District Court for the Northern District of California. The lawsuit states that financial reports from 2020-2022, “understated the risks posed to the company by not disclosing that likely interest rate hikes, as outlined by the Fed, had the potential to cause irrevocable damage to the company.” Additionally, the company “failed to disclose that, if its investments were negatively affected by rising interest rates, it was particularly susceptible to a bank run.” The complaint adds that Becker and Beck “intended to deceive Plaintiff and other members of the Class, or in the alternative, acted with reckless disregard for the truth when they failed to ascertain and disclose the true facts in the statements made by them . . . to members of the investing public . . . .” The lawsuit seeks damages for shareholders who lost significant portions of their investments due to this alleged malpractice.
The collapse of SVB, and the associated class action lawsuit, has created significant concern and confusion for SVB clients and shareholders. How long will the FDIC insure deposits? Is the bank fully operational? Is another bank going to rescue SVB, and if so, are depositors then clients of that bank? What will happen to contracts or agreements with SVB made prior to the closure?
The important idea to understand is that the FDIC has insured all deposits with SVB. That means that depositors, payroll servicers, SVB customers with lines of credit, and others will have complete access to their funds. All funds, assets, lines of credit, and contracts or agreements have been transferred into a bridge bank – Silicon Valley Bridge Bank.
Silicon Valley Bridge Bank is a full-service national bank chartered by the U.S. Department of the Treasury’s Office of the Comptroller of the Currency, and controlled by the FDIC. This new institution is designed to “bridge” the gap in time between the failure of SVB and the time it takes the FDIC to evaluate the value of the bank’s assets and find an acquiring bank. The FDIC is operating the bridge bank to maintain banking services as previously performed before closure with minimal disruption. All deposits in the bridge bank are guaranteed as long as it is in operation.
In summary, former customers of SVB can rest assured that Silicon Valley Bridge Bank is a fully operational bank designed to provide uninterrupted customer service and access to their funds until SVB is acquired. Additionally, pending a positive outcome from the class action lawsuit, shareholders may be entitled to damages due to financial malpractice of top SVB executives. While the situation continues to rapidly develop, the worst appears to be over for SVB clients and the financial system remains intact.
Student Bio: Alex Crowley is a second-year day student at Suffolk University Law School. He is a staff writer on the Journal of High Technology Law. Alex received a Bachelor of Science Degree in Biology from Stonehill College in 2017.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
