SVB failure doesn't threaten 'safety and soundness' of banking system: Analyst

Silicon Valley Bank (SIVB) was taken over by regulators Friday in the biggest bank failure since the financial crisis after the bank was unable to raise fresh capital following a run on deposits.

And as investors and analysts pick through SVB's failure, one analyst says it won't lead to bigger issues in the banking sector.

In a note to clients on Friday, TD Cowen analyst Jaret Seiberg wrote the bank's failure doesn't pose contagion risk, noting the failure is more about Silicon Valley's business model rather than broader problems in the banking system.

"We do not see this as the start of a broader threat to the safety and soundness of the banking system,” Seiburg wrote. "Much like Silvergate (SI), Silicon Valley had a unique business model that was less dependent on retail deposits than a traditional bank. This left the bank more exposed to interest rate risk as its funding got more expensive, but its assets were not repricing higher."

Seiburg says Silicon Valley Bank's failure appears to be a typical bank failure akin to those seen during the savings and loan crisis of the 1980s. Instead of being focused on real estate, the bank was focused on the tech industry. Seiburg said he expects regulators to revamp liquidity rules in response to this failure.

California state regulators seized the Santa Clara-based institution and appointed the Federal Deposit Insurance Corporation as receiver, meaning the FDIC will be able to sell off assets and return money to insured depositors.

Silicon Valley Bank became the largest bank to fail since Seattle's Washington Mutual during the height of the 2008 financial crisis and, behind Washington Mutual, the second-largest bank failure in U.S. history. It is also the first bank to fail since 2020.

Earlier this week, Silvergate Capital told investors it would liquidate and wind down operations after the bank's crypto-focused deposits saw massive outflows and resulted in steep losses for the bank. The same day Silvergate announced its plan, SVB Financial, Silicon Valley Bank's parent company, announced an ill-fated capital raise that ultimately led to the bank's demise.

Treasury Secretary Janet Yellen Friday convened leaders from the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency to discuss developments around Silicon Valley Bank and said she's watching the situation closely.

Earlier in the day, Yellen said in a hearing before the House Ways and Means Committee: "There are recent developments that concern a few banks that I'm monitoring very carefully and when banks experience financial loss it is and should be a matter of concern."

Less than two hours after Yellen's comments the FDIC had taken over SVB.

Dennis Kelleher, CEO of Better Markets, a non-profit that advocates for financial reform, said in a statement Silicon Valley Bank's failure is going to cause contagion and more bank failures.

"SVB's condition deteriorated so quickly that it couldn’t last just five more hours," Kelleher said in a statement. "This was precipitated by Federal Reserve policies since the 2008 crash, but especially more recently due to the pace and amount of interest rate increases. …Banks simply didn’t have the time to reposition their balance sheets and portfolios."

House Financial Services Committee ranking member Maxine Waters (D-CA) convened a bipartisan briefing for committee lawmakers Friday afternoon with Federal Reserve and FDIC officials to better understand the situation.

"I am alarmed by the failure of Silicon Valley Bank, which marks the second largest bank failure in U.S. history," Waters said in a statement.

Stocks fell sharply on Friday following this news with bank stocks under particular pressure as the KBW Nasdaq Bank Index (^BKX) fell 3.9% while the S&P SPDR Regional Banking ETF (KRE) which tracks smaller regional players fell 4.4%.

SVB Financial shares, which fell 60% on Thursday and were down another 62% before Friday's market open, remained halted for trade at the close on Friday.

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