What caused the run on Silicon Valley Bank?
Silicon Valley Bank has been great to the tech industry and had many good people working there – its stunning to see something like this happen.
Silicon Valley Bank (SVB) was a bank that specialized in providing financing and banking services to technology and life science companies.
Founded in 1983 by a group of entrepreneurs and venture capitalists in Silicon Valley! Recognizing the need for a bank that understood the unique needs of technology companies. The bank started by providing lending and banking services to start-ups and small businesses in the technology sector.
Here is the quick summary the saga of SVB:
In 2021 SVB saw a mass influx in deposits! Which jumped from $61.76bn at the end of 2019 to $189.20bn at the end of 2021.
Then as deposits grew, SVB could not grow their loan book fast enough to generate the yield they needed to see on this capital. As a result, they purchased a large amount (over $80bn!) in mortgage-backed securities (MBS). With these deposits for their hold-to-maturity (HTM) portfolio. Terrible risk management, moreover, no risk management. Interest rate hedging for any bank is essential. Furthermore, Silicon Valley removed $11 billion of hedges from their balance sheet.
97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%.
The issue is that as the Fed raised interest rates in 2022 and continued to do so through 2023. And as a result, the value of SVB’s MBS plummeted. This is because investors can now purchase long-duration “risk-free” bonds from the Fed at a 2.5x higher yield.
This is not a liquidity issue as long as SVB maintains their deposits. Since these securities will pay out more than they cost eventually.
However, last week, SVB announced that they had sold $21bn of their Available For Sale (AFS) securities at a $1.8bn loss.
And were raising another $2.25bn in equity and debt!
This came as a surprise to investors, who were under the impression that SVB had enough liquidity to avoid selling their AFS portfolio.
SVB focused on managing excess cash and services rather than providing risky lending(a VC activity)!
By stretching assets so far in the risk spectrum to have a super long balance sheet duration even considering the liability skew.
Anyway, then, venture capital partners tell their portfolio companies to withdraw funds. And they tell their friends. And they tell their friends. And you get the picture. Depositors wanted more cash than the bank had period!
Back to SVB’s expansion…
In the 1990s, as the technology industry continued to grow, SVB expanded its operations and began providing services to companies in other industries as well. The bank also started to offer additional services, such as wealth management and international banking.
In 1995, SVB became a public company and became listed on the NASDAQ stock exchange. The bank continued to grow and expand its operations, opening new offices in other technology hubs around the world.
In the early 2000s, SVB weathered the dot-com crash and continued to provide banking services to its clients. The bank started to invest in other companies, launching SVB Capital in 2000 to provide venture capital funding to emerging companies.
Today, SVB was a leading provider of banking and financing services to technology and life science companies.
Related reading: What is Silvergate Exchange Network? Why is it Shutting Down? Will First Republic Bank Fail ? (rebellionresearch.com)
What caused the run on Silicon Valley Bank?
