SVB Parent Company Files For Bankruptcy Amid Bank Turmoil

Tom Ozimek
By Tom Ozimek
March 17, 2023Business News
SVB Parent Company Files For Bankruptcy Amid Bank Turmoil
Security guards and FDIC representatives open a Silicon Valley Bank (SVB) branch for customers at SVB's headquarters in Santa Clara, Calif., on March 13, 2023. (Noah Berger/AFP via Getty Images)

The parent company of the collapsed Silicon Valley Bank (SVB) has filed for bankruptcy.

SVB Financial Group, which is no longer affiliated with SVB after the failed bank was taken over by the Federal Deposit Insurance Corporation (FDIC), said in a press release Friday that it has filed a petition for a court-supervised reorganization under Chapter 11.

The aim of filing for bankruptcy protection is to “preserve value” as it seeks buyers for its assets, SVB Financial Group said.

“The Chapter 11 process will allow SVB Financial Group to preserve value as it evaluates strategic alternatives for its prized businesses and assets, especially SVB Capital and SVB Securities,” William Kosturos, Chief Restructuring Officer for SVB Financial Group, said in a statement.

SVB Financial Group said it has about $2.2 billion of liquidity and other assets for which it’s “exploring strategic alternatives,” understood to mean some type of acquisition.

Funded debt for SVB Financial Group is about $3.3 billion in aggregate principal amount of unsecured notes. SVB Financial Group also has $3.7 billion of preferred equity outstanding.

Not included in the bankruptcy filing are SVB Securities and SVB Capital’s funds and general partner entities, which continue to operate normally.

The move comes several days after SVB Financial Group said it was exploring “strategic alternatives” for its operations as Silicon Valley Bank undergoes an orderly wind-down known as “resolution” under the jurisdiction of the FDIC and the Federal Reserve.

As part of the resolution process, SVB is being run by a newly established bridge bank called the Silicon Valley Bridge Bank, which is open and is “conducting business as usual.”

Silicon Valley Bridge Bank is also not part of the Chapter 11 bankruptcy filing.

“The number one thing you can do to support the future of this institution is to help us rebuild our deposit base, both by leaving deposits with Silicon Valley Bridge Bank and transferring back deposits that left over the last several days,” said Tim Mayopoulos, who has been appointed as CEO of Silicon Valley Bridge Bank.

In a bid to restore depositor confidence and prevent a bank run, the FDIC has expanded its deposit guarantee coverage for SVB to include all deposits, not just those below the usual $250,000 coverage cap.

Kosturos said that SVB Financial Group would work “cooperatively” with Silicon Valley Bridge Bank in “finding practical solutions to maximize the recoverable value for stakeholders of both entities.”

The process of resolving SVB and establishing Silicon Valley Bridge Bank in its place means that SVB depositors are fully protected while shareholders and bondholders are exposed to losses. Still, in the resolution of SVB recoveries are possible as buyers are found for its assets.

California regulators shuttered SVB last Friday and appointed the FDIC as receiver, marking the biggest bank collapse in the United States since Washington Mutual went bust during the 2008 financial crisis.

SVB’s collapse was prompted by a $1.8 billion loss on a forced $21 billion bond liquidation that spooked investors and led to a bank run.

This led to an emergency response by U.S. financial authorities, including an expansion of the FDIC’s coverage limit and a special lending facility from the Fed to give banks access to funding under easier terms than normal.

Cash-short banks have borrowed around $300 billion from the Fed over the past week, the central bank said Thursday.

Nearly half the money—$143 billion—went to Silicon Valley Bridge Bank and a separate bridge bank set up in place of the defunct Signature Bank.

Implications of SVB, Signature Failures

The lighting-fast collapse of SVB and Signature Bank has fueled questions among everyday savers and retail investors about possible impacts on their finances, even if they didn’t have any deposits at either of the failed banks.

Following the twin collapses, the Federal Reserve rolled out an emergency funding facility for banks and other deposit-taking financial institutions, the Treasury Department backstopped the mechanism with $25 billion, and the FDIC expanded its guarantee to all deposits at the two banks.

President Joe Biden said on Monday that the emergency measures mean the U.S. banking system is “safe” and Americans can “have confidence” that their deposits are secure.

While bank stocks have taken a beating due to the twin failures, some experts say that the spillover implications for other banks are likely to be limited.

“This is a classic asset-liability mismatch, triggered by higher rates, and compounded by leverage,” Jurrien Timmer, director of global macro at Fidelity, said in a statement.

As the Federal Reserve has raised rates to quell soaring inflation, bond values have decreased and banks like SVB have taken losses on their bond assets.

“The good news is that this seems to be an isolated incident or at least a problem that may be limited to some smaller banks,” Timmer added.

While some economists have compared the current situation to the system-wide financial meltdown that took place in 2008, others pushed back on this idea, arguing that what happened now is more narrow in scope and unlikely to escalate into a systemic crash.

“In my view, this does not appear to be a situation that could become systemic, like the subprime mortgage collapse did in 2007,” Timmer said.

SVB’s failure was sparked when it took $1.8 billion in losses after liquidating much of its Treasury portfolio, which dropped in value due to the Fed’s interest-rate hikes.

FDIC chair Martin Gruenberg warned recently that U.S. banks are sitting on unrealized losses on their bond holdings of around $620 billion, but added that banks in the country are “generally in a strong financial condition and have not been forced to realize losses by selling depreciated securities.”

A few regional banks have seen their shares drop in the wake of the SVB and Signature failures and credit ratings agency Moody’s Investor Service has put six banks on review for a downgrade.

Also, Moody’s on Monday cut its view on the entire U.S. banking sector, from stable to negative, citing “rapid deterioration in the operating environment.”

From The Epoch Times

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