What happened to Silicon Valley Bank?

In the heart of Silicon Valley, a bank stood tall, serving as a financial backbone for the tech industry's most creative and forward-thinking businesses. Silicon Valley Bank (SVB) was a key player in the venture capital world, financing nearly half of all U.S. venture-backed healthcare and technology companies. From Airbnb to Pinterest, SVB's prestigious client roster was proof of its reputation as a reliable and trusted source of private banking, personal credit lines, and mortgages for tech entrepreneurs. But in a shocking turn of events, SVB collapsed, leaving behind $209 billion in assets and a void in the tech industry's financial landscape. In this article, we'll explore the rise and fall of SVB and its impact on the world of tech finance.

The collapse of SVB and its causes

In early March of 2023, SVB, a leading financial institution in the technology and life-science sectors, suffered a catastrophic collapse. This came after the bank's liabilities, heavily concentrated in the tech industry, incurred steep losses due to increased interest rates and a major downturn in growth.

How did the bank land here?

SVB Financial, the holding company of Silicon Valley Bank, had a significant customer base consisting of startups and venture capital firms. The COVID-19 pandemic resulted in these clients generating substantial cash flows, leading to a surge in deposits for the bank. In Q1 2020, SVB's total deposits stood at slightly over $60 billion, which remarkably increased to nearly $200 billion by the end of Q1 2022.

What did the bank do?

SVB Financial made significant investments in what seemed like secure assets, primarily consisting of longer-term U.S. Treasury(s) and government-backed mortgage securities. These investments caused the bank's securities portfolio to surge from roughly $27 billion in Q1 2020 to around $128 billion by the close of 2021.

Why was that a problem?

While these securities are considered low-risk investments, they offer fixed interest rates for extended periods. This situation would not have been an issue if the bank didn't require to sell these securities urgently. However, with the recent significant rise in market interest rates, these securities were now valued less in the open market than what they were valued at on the bank's financial books, as bond prices have a negative relationship with interest rates. Therefore, the bank had to sell them at a loss.

This circumstance resulted in SVB's unrealised losses on its securities portfolio reaching over $17 billion by the end of 2022. This value represents the difference between the cost of the investments and their current market value.

By the end of 2022, SVB faced a challenging financial situation due to significant unrealised losses of over $15 billion for securities held to maturity. Despite the bank's attempts to improve its financial standing, the case continued to worsen, eventually leading to its collapse. 

Adding fuel to the fire

In addition to the securities portfolio losses, SVB also experienced a shift in its deposit inflows, which turned into outflows as its clients burned cash and stopped receiving new funds from public offerings or fundraisings. Furthermore, attracting new deposits became more costly as the rates demanded by savers increased alongside the Fed's hikes.

As a result, the bank's deposits decreased from nearly $200 billion at the close of March 2022 to $173 billion by the end of the year. This trend is continued this year, with SVB initially forecasting its deposits to decline by a mid-single-digit percentage in 2023 as of January 19. However, as of March 8, the bank revised its prediction to a low-double-digit percentage decline.

The bank's collapse was the result of a range of issues, such as inadequate risk management and a run on the bank fueled by investors in the tech industry. In addition, social media played a role in both the initial bank run and its aftermath, as those impacted by the possibility of losing their deposits demanded regulatory intervention to ensure that uninsured accounts received compensation.

Impact of SVB Crash on the Tech Industry

The collapse of SVB sent tremors through the tech industry and the broader financial community, with many questioning how such a significant event could have occurred. Analysts point to a lack of diversification in SVB's portfolio as a key contributing factor, with the bank's heavy reliance on the tech industry leaving it vulnerable to sudden downturns.

How did this come ahead?

The situation reached a critical point when SVB announced that it had sold a significant portion of its securities, valued at $21 billion at the time of sale, incurring a loss of around $1.8 billion after tax. The bank's objective was to reset its interest earnings at today's higher yields and gain balance-sheet flexibility to address potential outflows while still supporting new lending. Additionally, it aimed to raise approximately $2.25 billion in capital.

And it didn't work

After SVB's announcement about selling a large chunk of securities at a loss, the bank faced more difficulties. The news led to a sharp drop in stock prices, making it challenging to raise capital, which resulted in the bank abandoning its share-sale plans. Additionally, venture capital firms reportedly advised their portfolio companies to withdraw deposits from SVB. Things took a turn for the worse when customers attempted to withdraw about $42 billion in deposits, equivalent to a quarter of the bank's total deposits, according to California regulators. The bank ran out of cash and was unable to meet the withdrawal requests.

This also highlighted the need for better regulation and oversight in the financial sector, particularly when it comes to the concentration of risk in specific industries. Many experts have called for stricter regulations to prevent banks from becoming too heavily concentrated in a single industry or asset class, which can lead to systemic risks in the event of a downturn.

The need for better regulation

The collapse of Silicon Valley Bank (SVB) raised concerns about the impact on the tech industry, but the sector proved more resilient than expected. The collapse highlighted the need for caution and responsible risk management in the fast-paced tech industry. 

Regulators reviewed SVB's financial records and found insufficient liquidity, leading to the California Department of Financial Protection and Innovation (DFPI) taking control and the Federal Deposit Insurance Corp (FDIC) becoming the receiver. 

The Deposit Insurance National Bank of Santa Clara was founded to restore access to protected deposits and reopen branches. About 85% of deposits were assessed as uninsured, causing panic among investors and depositors.

About the customer deposits

SVB Financial's collapse has raised concerns about the fate of its customers' deposits. According to SVB, a significant portion of its deposits is above the limit protected by the FDIC. The bank estimated that at the end of 2022, the amount of uninsured deposits in its US offices stood at $151.5 billion.

In response to the bank's collapse, the FDIC has assured customers that they will have full access to their insured deposits. While the FDIC has not yet determined the current amount of uninsured deposits, it has announced that uninsured depositors will receive an advance dividend within the next week. For the remaining amounts of uninsured funds, depositors will receive a "receivership certificate." As the FDIC sells off the assets of SVB, depositors may receive future dividend payments.

How did this affect the other banks?

Investors are selling bank stocks in response to SVB Financial's recent troubles, as well as the failure of Silvergate Capital, which was also affected by the value of its government debt being depressed by higher rates. The sell-off has affected other midsize lenders like First Republic Bank and Signature Bank, with their stocks being halted. The impact of higher rates on bank securities is not unique to SVB, as there were approximately $620 billion in unrealised losses in securities portfolios across all FDIC banks in the fourth quarter.

The fallout from the collapse of SVB was significant, with many tech startups and companies that had relied on the bank for financing and support scrambling to find alternative sources of funding. The collapse also raised concerns about the impact on the tech industry, with fears that a wave of bankruptcies and layoffs could follow.

Takeaway from the Collapse of SVB

One of the key takeaways from the recent banking crisis is the importance of immunisation (matching the duration and yield of a bank's assets with the cost and lifespan of its deposits). This is different from the issues that plagued banks during the 2008 financial crisis, which were primarily related to bad lending practices.

During the pandemic, many banks saw significant inflows of cash. While investing in short-term Treasuries or holding cash would have protected them from rising interest rates, it would have also lowered their income. Instead, many banks sought out higher-yielding investments that were considered "safe," which may have contributed to their current struggles. The fallout from this crisis raises questions about how banks manage the risk of rising interest rates and the importance of striking a balance between risk and yield.

The fall of SVB was the second-biggest in American history after Washington Mutual, which had failed in 2008. It was the greatest bank failure by assets since the 2007–2008 financial crisis. This emphasised how serious the situation was and how quickly steps needed to be taken to safeguard investors' and depositors' interests.

Despite the collapse of the parent bank, SVB's Chinese joint venture reassured customers that their operations were "sound" as of March 11, 2023. However, The UK government did reveal that it was working on a lifeline for British tech companies impacted by the failure of the bank and its UK division. This was an indication of the widespread impact of the collapse and the need for swift action to mitigate the fallout.

HSBC's £1 acquisition that made many headlines

HSBC UK Bank PLC acquired Silicon Valley Bank UK Limited for £1 to enhance its commercial banking franchise in the UK and serve innovative firms in technology and life sciences. For the fiscal year 2022, SVB UK reported deposits of £6.7 billion, loans of £5.5 billion, and profit before tax of £88 million. 

The acquisition will be paid for using available funds and will take immediate effect. HSBC plans to update its shareholders during the Q1 2023 results announcement on May 2, 2023. HSBC CEO Noel Quinn welcomed SVB UK's customers and noted that the acquisition would significantly enhance the bank's commercial banking capabilities.

The acquisition was made at no cost to the taxpayer, and depositors were fully protected, which was a relief for those who had invested in the bank.

The acquisition of Silicon Valley Bank UK by HSBC UK helped to alleviate some of these concerns, and it was seen as a positive step in mitigating the fallout from the collapse of the parent bank.

The Bottom Line

The collapse of SVB Financial, the parent company of Silicon Valley Bank, has raised concerns regarding the safety of customers' deposits, highlighting the importance of banks managing risk through immunisation. While investing in safe, high-yielding assets can be tempting; it can also contribute to a bank's struggles if they cannot sell those investments at a profit when interest rates rise.

These recent banking crises have drawn attention to the need for banks to be vigilant in managing risk, especially given the potential for further rising interest rates. Unfortunately, SVB Financial's difficulties have had a ripple effect on other institutions, resulting in a sell-off of bank stocks by concerned investors.

It's regrettable when banks become too enamoured with the promise of high returns and fail to fully comprehend the risks involved. However, it is reassuring to know that measures are in place to safeguard both insured and uninsured depositors in times of crisis.

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