The collapse of Silicon Valley Bank (SVB) and its subsequent takeover by the FDIC happened in rapid succession. According to Forbes, the bank was the 16th largest bank in the US and had over $212 billion in assets, as reported in their fourth-quarter report of 2022.1 Here is a summary of what we know so far that culminated in the collapse of a tech-startup bank.
Concentrated Customer Base Bearing Higher Risk During Rising Rates
SVB was primarily a bank and lender to companies in the tech industry, with many of its customers being startups. These types of companies are very vulnerable to volatility in the economy and rising interest rates. An article from Reuters explains that the IPOs for many of these startups were halted due to the rising interest rate environment, and private fundraising became costly. As a result, they needed to start pulling money out of their SVB accounts to cover important operational expenses like payroll.2 More and more of SVB's customers started doing that, causing the bank to run into liquidity issues. This was then made worse by the effect that rising interest rates had on US government Treasury Bonds.
Losses on Assets Needed for Liquidity
Banks do not store all the deposits given to them in a vault or in cash. They usually have a certain amount in cash reserves that is required and then invest the rest of the money. Much of SVB's assets were in US Treasuries, bonds backed by the US government. Generally, bond values have an inverse relationship to interest rates. When rates rise, bond values drop. So, when the Fed rapidly raised rates starting last year, SVB's bond portfolio value dropped. Normally, if you held the bonds to their maturity, this would not matter. The bondholder would receive interest payments from the US government and then receive their principal back when the bonds matured. The problem occurred when SVB had to sell off bonds early to cover withdrawal requests from its clients. According to Forbes, SVB had to sell $21 billion in treasury bonds, taking a $1.8 billion loss. They then tried to raise $2.25 billion in capital, yet failed to do so. Then, on Friday, March 10th, after a failed attempt to sell the company to raise funds for the withdrawals, the FDIC took over the bank.2
On March 12th, the FDIC announced that they would ensure that every depositor receives 100% of their funds by Monday, March 13th.3 As a reminder, the FDIC only insures $250k of a person or entity's account. They also included that the funds to cover the uninsured deposits would come from the liquidation of SVB's old assets.
This event is certainly shocking and spread much fear throughout the country and economy. For now, it seems like an event that is solely isolated to the tech startup sector of the market. According to Forbes, stock prices of large banks like JPMorgan and Wells Fargo slumped slightly last Thursday but then were up on Friday, the day that SVB collapsed. The larger banks also have a more diversified client-base, insulating them from the kind of risk that SVB was exposed to. SVB mainly served tech companies, so when it failed, it had no immediate effect on the everyday person's ability to access their bank account. Unfortunately, its client-base was very vulnerable to this rising interest rate environment. On top of that, its investment portfolio underperformed when it was needed the most, and the bank was unable to recover. The effects that its demise will have downstream are yet to be seen, but we are closely monitoring the situation. Let me know your thoughts or if you have any questions.