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What is the Deal With SVB’s Failure?
A Short Summary of What Went Wrong in Silicon Valley
Silicon Valley Bank, whose clientele include numerous startups and venture capital firms, is owned by SVB Finance. These clients generated a large amount of cash during the pandemic, which stimulated an increase in deposits (naturally).
SVB had around $60 billion in deposits at the end of the first quarter of 2020. By the end of the first quarter of 2022, that had risen sharply to just about $200 billion in an impressive steep ascent.
SVB Financial invested tens of billions of dollars in assets that appeared secure, including longer-term US Treasury bonds and securities backed by the federal government (which are virually risk-free according to textbook finance). At the end of 2021, SVB’s securities portfolio had increased from roughly $27 billion in the first quarter of 2020 to about $128 billion. (sources of numbers from the WallStreet Journal).
These securities are at virtually no risk of defaulting. But they pay fixed interest rates for many years. That isn’t necessarily a problem, unless the bank suddenly needs to sell the securities. Because market interest rates have moved so much higher, those securities are suddenly worth less on the open market than they are valued at on the bank’s books. As a result, they could only be sold at a loss.
As a reminder, fixed income investments are negatively correlated with their yields. If interest rates rise, the capital value of the securities drops and vice versa.
By the end of 2022, SVB’s unrealized losses on its securities portfolio had increased to more than $17 billion (mostly due to the higher rates since the pandemic and the war).
What’s to Follow
During this time, SVB’s deposit inflows changed to outflows as its clients used up their capital and ceased receiving new money via fundraising or public offerings. Because savers wanted higher rates in tandem with the Fed’s rate increases, attracting new deposits likewise became significantly more expensive. At the end of March 2022, deposits had decreased from roughly $200 billion to $173 billion (a 13.5% decrease).
And this year, it’s speeding up: SVB predicted their deposits would decrease by a mid-single-digit percentage in 2023 as of January 19. Yet, as of March 8, they anticipated a low-double-digit percentage reduction.
SVB announced that it had sold a significant portion of its securities, which were valued at $21 billion at the time of sale, for a loss of around $1.8 billion. The bank wanted to provide the flexibility it needed to handle prospective outflows and yet fund new loans while resetting its interest profits at today’s higher yields. Also, it planned to raise $2.25 billion in capital.
According to The Wall Street Journal, the share-sale announcement caused the stock to plunge in price, making it more difficult to obtain funds and forcing the bank to abandon its share-sale plans. Also, it has been reported that venture capital firms started instructing their portfolio companies to withdraw money from SVB.
According to a filing by California authorities, consumers attempted to withdraw $42 billion in deposits on Thursday, or nearly 25% of the bank’s entire deposits.bThe Federal Deposit Insurance Corp. does not provide coverage for a significant portion of the bank’s deposits because of their size. Customers will soon have complete access to their protected deposits by according to FDIC.