Behind the Silicon Valley Bank collapse

On Friday, US regulators shut down Silicon Valley Bank (SVB), the 16th-largest bank in the country, after a historic bank run the previous day left it completely insolvent. It represents the second-largest failure of a financial institution in American history, following the collapse of Washington Mutual in 2008.

⏪ Let’s start at the beginning: In early 2020, SVB started buying large amounts of longer-term, government-backed mortgage securities. Its portfolio rose from $27 billion in Q1 of 2020, to $128 billion by the end of 2021.

• These securities carry virtually no risk of defaulting, since they’re backed by the government. They pay out a fixed interest rate for years (sometimes decades), though the initial investment remains inaccessible over that time period.

But since the Federal Reserve’s recent spate of interest-rate hikes began after SVB purchased those securities, the assets are currently worth less on the open market than what SVB initially paid for them – with potential buyers able to find better (aka higher) rates elsewhere.

📉 That isn’t necessarily a problem… unless the bank gets into a pinch and needs to suddenly sell the securities to access capital – which is exactly what happened last Wednesday. After SVB saw a larger-than-expected decline in customer deposits over the past year, the bank was forced to sell a bundle of securities at a post-tax loss of ~$1.8 billion, along with announcing $2+ billion in new funding to shore up its capital reserves.

The announcement caused SVB’s stock price to drop 60+% the following day. This prompted several large VC firms to advise their companies to withdraw deposits from SVB, leading to the largest bank run in modern US history. The bank counted nearly half of all VC-backed US companies as customers.

• On Thursday, SVB’s customers ran ran ran faster than the gingerbread man to try and withdraw $42 billion of deposits – about a quarter of the bank’s overall total, and $25+ billion more than the second-largest bank run in the modern era (Washington Mutual).
• By noon on Friday, SVB was completely insolvent.

🗣️ Also worth mentioning: Under federal law, banks with at least $250 billion in deposits are required to run stress tests to see how they would perform under different hypothetical crises, such as higher interest rates combined with shrinking deposits, but “smaller” banks like SVB don’t. Plus, SVB reportedly didn’t have a Chief Risk Officer for the eight months leading up to last week’s collapse.

🤔 What happens next?... On Sunday, US regulators announced an emergency measure that will make all individuals and companies with an account at SVB whole by this morning – regardless of whether their funds were insured by the FDIC under its $250,000-per-account guarantee.

Had they not, regulators would have begun to sell off SVB’s assets to pay back uninsured depositors. But the payments likely wouldn’t have come soon enough to avoid paycheck delays for many of the estimated 100,000+ employees whose companies banked at SVB.

📊 Flash poll: Do you agree with US regulators’ decision to fully backstop all client deposits at the now-defunct Silicon Valley Bank?

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