A Silicon Valley lender collapsed after a run on the bank. Here's what to know

A bank that caters to many of the world's most powerful tech investors collapsed on Friday and was taken over by federal regulators, becoming one of the largest lenders to fail since the 2008 Global Financial Crisis.

California's banking regulators shut down Silicon Valley Bank and put it into receivership under the Federal Deposit Insurance Corp. (FDIC).

That effectively gives control of the bank to the FDIC, which created a new entity to oversee it.

Regulators announced the takeover after what was effectively a run on the bank. Depositors rushed to withdraw their money amid fears SVB wouldn't be able to meet redemption requests.

It was a collapse that sent shockwaves across the banking industry, hammering shares of other smaller and regional lenders.

Here's what to know about SVB.

What was Silicon Valley Bank?

Although it was not in the same league as, say, Goldman Sachs or J.P. Morgan Chase, Silicon Valley Bank, or SVB, punched above its weight during its 40-year history.

Based in Santa Clara, Calif., its clients included venture capital firms and startups, and it became a big player in the tech sector, successfully competing with bigger-name banks.

"They really developed a niche that was the envy of the banking space," says Jared Shaw, a senior analyst at Wells Fargo. "They are able to provide all the products and services any of these sophisticated technology companies, as well as these sophisticated venture capital and private equity funds, would need."

But it remained little known outside of tech circles — until this week.

So why is the bank in trouble now?

Silicon Valley's business boomed as tech companies did well during the pandemic. That filled the lender's coffers, and SVB had about $174 billion in deposits.

But in recent months, many of Silicon Valley Bank's clients had been withdrawing money at a time when the tech sector as a whole has been suffering.

SVB said earlier this week, that in order to make good on those withdrawals, it had to sell part of its bond holdings at a steep loss of $1.8 billion. Bonds and stocks have been hammered since last year, as the Federal Reserve has raised interest rates aggressively, and SVB also noted it wanted to pare down its bond portfolio to avoid further losses.

But that announcement spooked the bank's clients, who got worried about SVB's viability, and then proceeded to withdraw even more money from the bank — a textbook definition of a bank run.

That led to a major slump in SVB's shares. The bank's stock price fell by 60% on Thursday, and as its share price continued to sink overnight.

Trading was halted on Friday morning, and by midday, SVB had been taken over by the FDIC.

What does this mean for other banks?

Though the problems appear to be isolated at SVB, the run on the bank sparked concerns about the banking sector as a whole. On Thursday, shares of all kinds of lenders, including the big banks, sagged. J.P. Morgan, Wells Fargo, and Bank of America were all down about 5%.

Investors feared that other lenders, especially smaller and regional ones, would suffer a similar surge in withdrawals and would struggle to meet the redemptions.

The troubles at SVB come as Wall Street had already been on edge. Earlier this week, Silvergate, a California-based bank that caters to the cryptocurrency industry, announced plans to unwind its operations.

Yet by Friday, fears about the health of the broader banking sector had eased, even before the FDIC took over SVB.

Bank analysts at Morgan Stanley said in a note "the funding pressures facing" Silicon Valley Bank "are highly idiosyncratic and should not be viewed as a read-across to other regional banks."

"We want to be very clear here," they wrote. "We do not believe there is a liquidity crunch facing the banking industry."

Wells Fargo analyst Shaw also said other banks were hit by panic selling.

"It's really just a fear that has gripped the market, and is sort of self-perpetuating at this point," says Shaw.

What happens next?

The entity created by federal regulators to oversee SVB, the Deposit Insurance National Bank of Santa Clara, has quite a few things to sort out.

The FDIC said those with insured deposits with SVB, typically up to $250,000, would be able to access their money by no later than Monday.

The fate of those with deposits at SVB that exceed insurance limits is less certain, however, with the FDIC saying they will receive an "advance dividend" for a portion of their funds along with "certificates" accounting for their uninsured funds.

The regulator did not spell out what that would entail for these uninsured depositors.

Investors will also continue to monitor for any further impact on other banks. The Treasury Department said Secretary Janet Yellen discussed the situation at a meeting she convened with financial regulators.

"Secretary Yellen expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient and regulators have effective tools to address this type of event," the statement said.