The failure of Silicon Valley Bank could spark a run on other regional and midsized banks across the country if wealthy individuals rush to pull their money out of accounts with values too high for FDIC coverage and flee to larger institutions amid fears that risk to all but the most sizable institutions could be systemic, sources reportedly told the New York Post.
See: Silicon Valley Bank branches closed by regulator in biggest bank failure since Washington Mutual
“Small regional banks are done,” one unnamed banking source reportedly told the New York Post. “Everyone is going to want to put their money in JPMorgan JPM, +2.54% or Bank of America BAC, -0.88%. ”
If a buyer steps in this weekend to scoop up the assets of SVB Financial Group SIVB, -60.41%, which catered to startups in tech and other industries, a disaster would likely be averted.
But potential buyers are skittish about taking over the collapsed bank without backing from the federal government. There’s simply too much uncertainty and risk associated with a deal unless the government steps in, people described as having knowledge of prospective buyers’ thinking reportedly told the New York Post.
“My instinct is either someone buys the whole thing with concessions from [the] government or it goes to receivership,” one banker close to the negotiations reportedly told the Post.
Silicon Valley Bank was shuttered on Friday by California regulators and placed into receivership with the Federal Deposit Insurance Corp.
“No one wants to do the deal without a government backstop,” a private-equity insider echoed. “The government needs to prepackage a deal, like they did with Lehman.”
Another banker pointed out the Lehman Brothers collapse in 2008 is still being tied up nearly 15 years after its failure.
“No one wants to take on that kind of headache,” said the private-equity insider.
One top investment bank sent a note to clients advising them on what could happen if no Silicon Valley Bank buyer steps in, according to a transcription reviewed by the New York Post.
The note outlined how the FDIC is spending the weekend assessing the value of SVB’s assets. It will pay out up to $250,000 in insurance coverage for accounts at that level or below on Monday. The agency will also make a payment, called an advanced dividend, to uninsured depositors as quickly as possible.
“The rest may take anywhere from 60 days to 2 years to get paid out,” the note said, adding that companies waiting for payouts will find investors and lenders available to try to finance the amounts the FDIC says they will get. Ultimately SVB clients could get 80 to 90 cents for each dollar they had on deposit, but it could take years for that to happen.
And that may be too late for many of the small businesses with tight ties to the bank.
The wrangling behind the scenes Saturday took place as small businesses across the country, from Etsy ETSY, -1.63% sellers to Camp toy stores, faced cash crunches because they can’t get at their money while the bank is shuttered.
Camp stores sent a desperate message to customers telling them to use BANKRUN as a promo code to buy up products because the toy chain needs cash after its funds were temporarily locked up, or worse, in the collapse of SVB. Etsy sellers took to TikTok to express their fears after they were told funds wouldn’t be transferred to their accounts until Monday at the earliest.
It’s also spreading to the crypto trading sector.
On Saturday, the value of USD Coin USDCUSD, +2.63%, a cryptocurrency that’s supposed to remain equal in value to the U.S. dollar, fell amid selling sparked by news that the company behind it, Circle Internet Financial, had $3.3 billion in SVB.
See: Stablecoin USDC falls below $1, faces $3.3 billion exposure to Silicon Valley Bank
The digital currency, known as a stablecoin, is key to crypto trading, a sector that’s still reeling from the November collapse of the crypto platform FTX.
Separately, the bank’s branches in the U.K. were shut down.
The Bank of England said that it would place Silicon Valley Bank’s U.K. subsidiary into insolvency procedure late Friday, and that it would stop making payments and accepting deposits.