Silicon Valley Bank was shuttered by US regulators on Friday after customers raced to withdraw $42bn — a quarter of its total deposits — in one day and a failed effort to raise new capital called into question the future of the tech-focused lender.

With about $209bn in assets, SVB has become the second-largest bank failure in US history, after the 2008 collapse of Washington Mutual, and marks a swift fall from grace for a lender that was valued at more than $44bn less than 18 months ago.

The Federal Deposit Insurance Corporation, the US regulator that guarantees bank deposits of up to $250,000, said it was closing SVB and that insured depositors would have access to their funds by Monday.

It came after a run on the California-based bank on Thursday, during which SVB’s deposit holders initiated withdrawals that ultimately totalled $42bn, in some cases after encouragement from their venture capital backers.

The scale of the withdrawals was revealed in a possession order by a California financial regulation agency on Friday, which said the bank was insolvent and its liquidity position was inadequate. It also said that SVB had a “negative cash balance” of around $958mn.

Many of SVB’s clients were venture capital funds as well as tech and healthcare start-ups, and would have account balances well in excess of the maximum amount insured by the FDIC. The regulator said these depositors would receive an initial payment next week and the rest would depend on what happens to SVB’s assets.

The regulator historically has sought to merge failed lenders with a larger and more stable institution. Washington Mutual, for example, was sold to JPMorgan Chase. The FDIC said it would use the sale proceeds of SVB to fund payouts to larger depositors.

More than a dozen leading venture capital firms — including Khosla Ventures, Accel, Greylock Partners, General Catalyst and Ribbit Capital, which collectively back many start-ups in SVB’s customer base — said in a statement Friday they would stand behind the bank if it were “purchased and appropriately capitalised”. Absent from that list were Sequoia and Andreessen Horowitz, two of the largest and most influential firms in Silicon Valley.

At the end of 2022, SVB estimated that almost 96 per cent of its $173.1bn in deposits exceeded or were not covered by FDIC insurance. By comparison, Bank of America has estimated that around 38 per cent of its $1.9tn in deposits were not covered by FDIC insurance.

The prices on SVB’s bonds plunged on Friday, with its senior debt trading at about 45 cents on the dollar and its junior debt as low as 12.5 cents, suggesting bondholders are braced for heavy losses.

Earlier on Friday, SVB had abandoned its efforts to raise $2.25bn in new funding to cover losses on its bond portfolio and had begun looking for a buyer to save it, according to people with knowledge of the efforts.

SVB shares were halted during early trading on New York’s Nasdaq exchange, and its woes hit shares in several other US banks that are seen to have similar depositor and funding profiles.

Trading in PacWest, Western Alliance and First Republic were stopped because of the volatility after they all initially fell 40 to 50 per cent. Trading was also briefly stopped in Signature Bank after its shares fell nearly 30 per cent. Several of those banks sought to reassure the market by putting out statements highlighting their differences from SVB in terms of asset and depositor base.

The banking group’s troubles stem from a decision made at the peak of the tech boom to park $91bn of its deposits in long-dated securities such as mortgage bonds and US Treasuries, which were deemed safe but are now worth $15bn less than when SVB purchased them after the Federal Reserve aggressively raised interest rates.

It had planned to sell $1.25bn of its common stock to investors and an additional $500mn of mandatory convertible preferred shares, which are slightly less dilutive to existing shareholders. That would have helped bridge the roughly $1.8bn in losses SVB incurred from the sale of about $21bn of securities initiated to cover customers withdrawing deposits.

On Thursday, SVB and its underwriter Goldman Sachs raced to complete the share offering. While Goldman had secured enough interest in the convertible bond deal by mid-afternoon, the common stock sale was struggling as SVB shares slid, said one person with knowledge of the efforts. Private equity firm General Atlantic had also committed to provide $500mn in equity if the offering had been completed.

The bank’s shares registered their biggest-ever decline on Thursday, wiping $9.6bn off its market capitalisation. SVB shares had fallen more than 60 per cent in pre-market trading on Friday before the trading halt.

US bank failures have been extremely rare in recent years; the last FDIC insured bank to close was in October 2020, and the last time there were more than 10 was 2014.

In a statement on Friday, the US Treasury department said secretary Janet Yellen had met with top officials from the Federal Reserve, FDIC and the Office of the Comptroller of the Currency, which also oversees banks, to discuss the SVB fallout.

“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.

Cecilia Rouse, the outgoing chair of the White House Council of Economic Advisers, also tried to send a reassuring message, saying: “Our banking system is in a fundamentally different place than it was . . . a decade ago.”

SVB’s collapse came two days after Silvergate, a San Diego-based bank that catered to the crypto industry, said it would voluntary wind down after customers withdrew billions of dollars.

The Bank of England has also moved to put the UK arm of Silicon Valley Bank into resolution after it applied for £1.8bn of liquidity. Officials there have begun conversations with professional services firms on overseeing the resolution process.

The ramifications of SVB’s troubles may be widely felt. The lender is the banking partner for half of US venture-backed tech and life sciences companies, and is a large presence in offering credit lines to the $10tn private capital industry.

Its customers had begun to grow increasingly fearful of the bank’s financial position on Thursday, when some start-ups began pulling their cash. Some venture capital groups acknowledged that they had begun advising some of their portfolio companies to consider withdrawing a portion of their deposits from the lender earlier this week.

“SVB’s 40 years of business relationships supporting Silicon Valley evaporated in 14 hours,” said a senior executive at one multibillion-dollar venture capital fund.

Reporting by Joshua Franklin, Eric Platt, Ortenca Aliaj, Antoine Gara and Brooke Masters in New York and Tabby Kinder and George Hammond in San Francisco. Additional reporting by Stephen Gandel in New York, Colby Smith and Lauren Fedor in Washington and Laura Noonan and Robert Smith in London