Silicon Valley Bank’s Shocking Collapse

Timeline: The Shocking Collapse of Silicon Valley Banks

A few days ago, Silicon Valley Bank (SVB) was still considered a highly respected player in the technology space, counting thousands of US venture capital-backed startups as its clients.

But fast-forward to the end of last week, and SVB was shut down by regulators after a panic-induced bank run.

So how exactly did it happen? We dig down below.

The Road to a Bank Run

SVB and its customers generally prospered during the low interest rate era, but when interest rates rose, SVB was more exposed to risk than a typical bank. Still, the bank’s balance sheet at the end of 2022 showed no cause for alarm.

The bank was also seen positively in several places. Most Wall Street analyst estimates were overwhelmingly positive on the bank’s stock, and Forbes had just added the bank to its Financial All-Stars list.

Outward signs of trouble emerged on Wednesday, March 8, when SVB surprised investors with news that the bank needed to raise more than $2 billion to shore up its balance sheet.

The reaction from prominent venture capitalists was not positive, with Coatue Management, Union Square Ventures and Peter Thiel’s Founders Fund moving to limit exposure to the 40-year-old bank. The influence of these firms is believed to have added fuel to the fire and a bank run ensued.

The decision-making was also influenced by the fact that SVB had the highest percentage of uninsured domestic deposits of all major banks. These amounted to nearly $152 billion, or about 97% of all deposits.

ℹ️ The Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 per account, per bank, for depositors.

By the end of the day, customers had tried to withdraw 42 billion dollars in deposits.

What triggered the SVB collapse?

While the collapse of SVB took place over the course of 44 hours, its roots trace back to the early pandemic years.

In 2021, US venture capital-backed companies raised a record 330 billion dollars— double the amount seen in 2020. At the time, interest rates were at rock-bottom levels to help lift the economy.

Matt Levine sums up the situation well: “When interest rates are low everywhere, a dollar in 20 years is about as good as a dollar today, so a startup whose business model is, “we’re going to lose money for a decade building artificial intelligence , and then fetch lots of money in the distant future” sounds pretty good. When interest rates are higher, a dollar today is better than a dollar tomorrow, so investors want cash flows. When the interest rate was low for a long time and suddenly becomes high, all the money that was rushing to your customers is suddenly cut off.”

Year US venture capital activity Annual % change
2021 $330 billion 98%
2020 $167 billion 15%
2019 $145 billion 1%
2018 $144 billion 64%
2017 $88 billion 6%
2016 $83 billion -3%

Source: Pitchbook

Why is this important? During this time, SVB received billions of dollars from these venture-backed clients. In one year alone, their deposits increased 100%. They took these funds and invested them in long-term bonds. Consequently, this created a dangerous trap as the company’s expected prices would remain low.

During this time, SVB invested in bonds at the top of the market. As interest rates rose higher and bond prices fell, SVB began to take large losses on their long-term bond holdings.

Losses fueling a liquidity crunch

When SVB reported its fourth quarter results in early 2023, Moody’s Investor Service, a credit rating agency, took notice. In early March, it said SVB was at high risk of a downgrade because of its significant unrealized losses.

In response, SVB sought to sell $2 billion of its investments at a loss to help add liquidity to its struggling balance sheet. Soon several hedge funds and venture investors realized that SVB might be on thin ice. Depositors withdrew funds in droves, spurring a liquidity squeeze and prompting California regulators and the FDIC to step in and shut down the bank.

What happens next?

While much of SVB’s activity was focused on the tech sector, the bank’s shocking collapse has rattled a financial sector already on edge.

The four largest American banks lost a combined 52 billion dollars the day before the SVB collapse. On Friday, other bank stocks saw double-digit declines, including Signature Bank (-23%), First Republic (-15%) and Silvergate Capital (-11%).

Name Share price change, 10 March 2023 Unrealized losses / Tangible equity
SVB Financial -60%* -99%
First Republic Bank -15% -29%
Zions Bancorp -2% -47%
Comerica -5% -47%
US Bancorp -4% -55%
Fifth Third Bancorp -4% -38%
Bank of America -1% -54%
Wells Fargo 1% -33%
JPMorgan -1% -21%

Source: Morningstar Direct. *Represents data for March 9, trading halted March 10.

When the dust settles, it is difficult to predict the ripple effects that will arise from this dramatic event. For investors, Treasury Secretary Janet Yellen announced confidence that the banking system remains resilient, noting that regulators have the right tools in response to the problem.

But others have seen problems arise as far back as 2020 (or earlier), when commercial bank assets skyrocketed and banks bought bonds when interest rates were low.

The whole sector is in crisis and the banks and investors backing these assets will have to figure out what to do.-Christopher Whalen, the institutional risk analyst

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