Why is Silicon Valley Bank crashing?
Silicon Valley Bank, one of the 20 largest banks in America, enters crisis mode with the stock plummeting 75%!
They have been great to the tech industry and have many good people working there – its stunning to see something like this happen.
Silicon Valley Bank (SVB) is a bank that specializes 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.
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, yesterday afternoon, 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.
Now, venture capital partners tell their portfolio companies to withdraw funds. And furthermore, spreading panic could lead to a bank-run that should or could have become prevented.
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 is a leading provider of banking and financing services to technology and life science companies. In fact famed investor Bill Ackman took to Twitter calling for a government bailout. If a private sector could not come to fruition. As SVB is a vital part of the US economy.
Related reading: What is Silvergate Exchange Network? Why is it Shutting Down?