Earlier in the day, trading was halted on shares of Silicon Valley Bank — one of the main places California tech start-ups deposit the millions in investment cash they get from venture capitalists — after they fell 60 percent Thursday. The Santa Clara, Calif.-based bank said in a filing the day prior that it had sold $21 billion in assets and was selling more of its own stock to raise money. Tech investors and founders on Twitter said the move was unexpected, and some encouraged start-ups who had money deposited with the bank to withdraw it earlier in the week.
The government said insured depositors would have access to their money by Monday, while telling others who had funds over the $250,000 insured by the government to call a hotline. A spokesperson for the bank did not return a request for comment.
“There’s clearly panic going on,” said Cornelius Hurley, an adjunct banking law professor at Boston University School of Law. “But sometimes panic can be rational.”
Although it was not immediately clear how much danger the bank’s weakened state posed to the global financial system, trading was halted on several other regional banks’ stocks Friday morning and some markets were down.
Treasury Secretary Janet L. Yellen said at a hearing Friday that she is monitoring developments at a few banks, including Silicon Valley Bank.
“When banks experience financial losses, it is and should be a matter of concern,” she said.
Over the last year, share prices for tech companies have cratered as high interest rates and concerns about the economy cut into the amount of money available for investment in big tech projects and start-up funding. Both big and small companies have laid off tens of thousands of workers — though most companies are still making money and growing, and concerns are far lower than they were during the dot-com crash or the financial crisis of 2008. Large company CEOs have blamed the layoffs on over-hiring during the pandemic, while venture capitalists have said the pullback in new start-up funding was a needed correction from years of over-exuberance.
Still, the panic over Silicon Valley Bank revealed deeper fears that the economic situation in Silicon Valley could get worse. Arjun Sethi, co-founder of venture investor Tribe Capital, said in a memo posted to LinkedIn that the industry was one-third of the way through “the desert” and that founders should be prepared for new funding to become harder to come by.
“Our advice to founders: Call every debt line, close all primary rounds, do it now, and be willing to make concessions,” Sethi said. “The restructuring will be significant.”
A bank failure of this magnitude may trickle down to taxpayers. Federal regulators will have to sell Silicon Valley Bank’s assets to cover its advances. If the federal deposit insurance fund is used, it will need to be replenished, Hurley said.
Shares in other banks fell Thursday too as the concerns over Silicon Valley Bank spread. First Republic Bank, which also serves many California tech companies, fell 16.5 percent. JPMorgan Chase fell 5.4 percent and Wells Fargo fell 6.2 percent.
Similar banks may have to prove to their customers that they are managing things differently than Silicon Valley Bank to keep confidence, said Hurley.
“Silicon Valley was a niche bank,” he said. “It was profitable as long as that niche was profitable. and as long as they managed their balance sheet properly.”
The bank’s problem represent one of the early signs of financial stress caused by the Federal Reserve’s year-long campaign to raise interest rates. With inflation still uncomfortably high, the Fed is expected to continue raising rates. Investors now anticipate the central bank’s benchmark rate may rise to near 6 percent from a current target range of 4.5 percent to 4.75 percent.
Fed Chairman Jerome H. Powell says higher rates are needed to cool off an overheated economy and ease price pressures. But as rates go higher, additional financial losses are likely to emerge at other institutions.
“If the Fed keeps jacking up rates, it’s going to exacerbate the situation,” said Bert Ely, a veteran banking industry consultant.
The tech industry has been grappling with the changing economy and renewed pressure from Wall Street investors to cut costs and focus on profit after years of spending money to continuously grow their businesses.
During the pandemic, big companies like Amazon, Facebook and Google hired tens of thousands of new workers to take advantage of the growth in demand for digital services as lockdowns forced people to work, shop and get their recreation through the internet. But as people returned to their in-person lives, and the stimulus funding pushed into the economy by the government dried up, the tech companies that had benefited the most from the pandemic-era economy saw their stock prices plummet.
Over the past several months, most of them have cut costs and fired workers, something that few have had to do over the past decade. The cuts have prompted soul-searching in Silicon Valley, where tech workers had grown accustomed to high salaries and constant demand for engineers and salespeople.
“I am hearing from dozens of founders about what to do at SVB,” Howard Lerman, the co-founder of business software company Yext, said on Twitter. “It’s an all out bank run.”
Jeff Stein and David Lynch contributed to this report.
