Established in 1983 and headquartered in California, Silicon Valley Bank was not a household name and yet a few weeks ago it was the 16th largest bank in the US with $212 billion in assets.
SVB listed on Nasdaq (ticker: SIVB) in 1988 and enjoyed a golden reputation among tech insiders. The bank served many tech startups, describing itself on its website as “the financial partner of the innovation economy.” While this sounds both glamorous and risky, it was neither. What SVB primarily did was bread-and-butter banking for tech companies in Silicon Valley.
Problems started once interest rates rose, and the bank lost money on its bond portfolio (most of its government-backed bonds had long maturity dates). Learning of the losses, customers began withdrawing large sums, and the bank closed on March 10th, after government regulators took over.
While there are almost certainly plenty of complex wrinkles that will come to light-- both the SEC and the Department of Justice are investigating the SVB collapse-- what’s known so far is the story we tell below.
The Makings of a Bank Run
As sometimes happens, what seemed like very good news for SVB ultimately proved bad news indeed.
The hardships of the pandemic proved a boon for Silicon Valley Bank, which was a darling among technology entrepreneurs (whose needs it catered to). During that time, the startup tech sector performed well, as many people living under stay-at-home restrictions bought cutting-edge gadgets and whiled away their hours on line.
Because of its location and its name, SVB was where many tech startups put their money, creating a surge in deposits.
While SVB took the uncontroversial step of investing its depositors’ cash, some of the bank’s decisions about where to park that cash eventually caused problems. SVP invested in US government bonds with long maturity dates, as well as investing in mortgage-backed securities.
This strategy made sense in a low-interest-rate environment, but proved disastrous once interest rates began to climb. Last year, as the Federal Reserve raised interest rates seven separate times, the value of SVB’s bonds fell.
In addition, during the past year many tech companies saw their growth slow. Companies like Amazon, Microsoft, and Meta (the old Facebook) announced large layoffs. Some of these tech companies started to withdraw money from SVB, but much of the money was tied up in bonds that could only be sold at a loss.
As SVB’s customers withdrew more money, the bank was forced to sell a large bond portfolio. In early March, the bank recognized a $1.75 billion loss from bond sales, and on March 8th, it told investors it would need to recoup these losses by raising capital.
This announcement was poorly received by customers and investors— spurring those with deposits at SVB to withdrew their funds without delay. Panic spread, and in essence, there was an old-fashioned run on the bank.
The bank run was especially swift (it spanned just two days) because so many of SVB’s customers were successful tech companies with enormous accounts. These large accountholders rushed to make withdrawals in part because the FDIC only insures deposits up to $250,000, and many of these accounts were far larger.
By Friday, March 10th, Silicon Valley Bank had collapsed, making it the largest bank failure since the global financial crisis of 2007-2008.
On Friday, the federal regulators stepped in, promising they would pay SVB depositors what they were owed (even when the sums exceeded FDIC limits). The government also made clear that it would not bail out shareholders of SVB; they will need an acquirer in order to protect their investments.
The Blame Game Begins
Fears that what happened at SVB would happen at other banks roiled the financial markets.
On Sunday, in the hopes of containing the contagion, government regulators took over New York City-based Signature Bank after customers spooked by the SVB collapse withdrew over $10 billion. (Reportedly, the SEC and the Justice Department were already investigating whether Signature was doing enough to detect potential money laundering by crypto clients, according to numerous press reports.)
Almost immediately, the finger-pointing began in earnest.
Trump-era deregulation efforts that allowed SVB and Signature to be more lightly regulated than the biggest banks is getting some of the blame. In 2018, for instance, the president “signed a law that allowed midsized banks like SVB to skirt some of the strictest post-financial crisis regulations,” according to Bloomberg.
Others are taking aim at risky financial practices employed by SVB management.
For community banks and credit unions concerned about what the collapse of SVB and Signature might mean for you and for the industry more broadly, RiskScout is here to help. Get in touch or check out our webinar "Learning from SVB and Signature Bank - Contingency Planning & Complex Markets."