SVB Financial, also known as Silicon Valley Bank, was closed down, March 10, 2023 resulting in the second-biggest bank failure in history. Just a week before, the CEO of the financial group had proudly boasted about being the best financial partner in challenging times. According to Bloomberg in March 2021 the bank’s total deposits had doubled from $62 billion to $124 billion in 12 months, far outpacing JPMorgan Chase & Co. and First Republic Bank. The bank’s collapse came suddenly after its established customer base of tech startups yanked their deposits. To shore up its balance sheet, the bank needed to offload a large portion of its bond investments at a loss to increase its liquidity, which spooked depositors. The bank was downgraded by Moody’s on Wednesday, which further complicated matters. Investors tried to pull out $42 billion on Thursday, leaving the bank with a negative cash balance of almost $1 billion.
The Federal Reserve had pinned interest rates at unprecedented lows, and in a radical shakeup of its framework, it promised to keep them there until it saw sustained inflation well above 2%. SVB had taken in tens of billions of dollars from its venture capital clients and then plowed that cash into longer-term bonds, confident that rates would stay steady. However, when the Fed continued to hike, the inverse relationship between interest rates and bonds saw the value of bonds go down as yields went up, catching banks like SVB off-guard. Because SVB primarily invested in long-term bonds, which they typically held and had never had to report on, this put them in a bind. The fall in bond value resulted in unrealized losses because SVB had to convert its bonds and sell them at current market prices, equating to mega losses and funding concerns.
According to Logan Kane of Seeking Alpha, the bank seems to have run into trouble with loans against non-public companies, wineries, venture capital, and investments in long-duration Treasuries. This was enough to do them in. Banks like SVB had made bets on interest rates falling in a bunch of different non-obvious ways. Their depositors (liabilities) were largely VC-funded businesses that were getting massive amounts of funding due to rock-bottom interest rates. Their assets also largely depended on interest rates falling, or at least not going up. SVB was not the only bank that made bets like this. In fact, the failure of SVB came after the failure of La Jolla, Calif.
SVB’s exposure to long-term bonds, snapped up during the period of rapid deposit growth, did not raise any red flags for a while. SVB easily cleared regulatory hurdles assessing its financial health. However, severe losses on long-term bonds, largely shielded from view thanks to accounting rules, were beneath the surface. The bank had mark-to-market losses in excess of $15 billion at the end of 2022 for securities held to maturity, almost equivalent to its entire equity base of $16.2 billion.
SVB’s collapse into FDIC receivership came suddenly on Friday, prompting shares of regional banks to fall. California’s financial regulator and the FDIC announced a potential sale of SVB Financial Group “to protect insured depositors” who wanted their money. SVB had to raise additional capital by selling its investment portfolio. Not only did SVB lose $1.8 billion following the sale of $21 billion in securities, but it also offered common and convertible preferred stock. The news of the SVB debacle sent the stock plunging another 60% from Thursday and had a trickle-down effect through the markets as four of the biggest banks lost a combined total of $52 billion in market value.
The collapse of SVB Financial Group This serves as a reminder of the importance of risk management in the banking industry and the need for banks to carefully consider their investment strategies and exposure to different types of assets. As the banking industry continues to face historic shifts, banks must remain vigilant and adapt to changing market conditions to avoid a similar fate.
Written by Abolaji