SVB Timeline
SVB was a mid-sized bank, with $173 billion in deposits. The bank almost exclusively catered to tech companies in the Silicon Valley district of California (hence its name). Namely, tech startups, which consisted of 30% of all uninsured deposits.
2020-2021:
During the tech boom beginning after the coronavirus pandemic, depositors flocked to SBV. The bank had more deposits in 2020Q2 ($12 billion) than in all of 2019 combined. Deposits climbed to over $20 billion during 2021Q3, before beginning a swift and stunning reversal. The bank experienced withdraws of $10 billion in 2022Q1 and 2022Q2 leading up to its collapse.
March 8, 2023:
SBV announces the sale of $1.25 billion of its common stock and $500 million of depositary shares. In addition to the previous sales, General Atlantic agrees to purchase $500 million of common stock. In total, SBV intends to raise $2.25 billion.SBV announced this sale in light of a $21 billion securities offloading, of which SBV took a $1.8 billion after-tax loss. Moody’s downgrades SBV’s bond rating a few hours later.
March 9, 2023:
SIBV, SBV’s parent company, stock crashes 40% in premarket trading and would end the day down over 60% at a closing price of $106.04 per share, from $267.9 just a day before. The crash wipes out over $9 billion in market value. Turmoil spreads to the rest of the banking industry. JPM, Goldman Sachs, and Bank of America all experience significant declines, losing $40 billion in market value combined.
Around this time, venture capital firms begin advising their clients to withdraw money from the bank. Panic turned into a frenzy. Fueled by social media, the proverbial wildfire spread quickly. Depositors attempt to withdraw $42 billion in customer funds.
March 10, 2023:
Trading of SIBV halts. The FDIC steps in, assuming total control of the bank. FDIC announces insured depositors will have access to their money on March 13. However, of the $173 billion in total deposits, only about 11% is FDIC insured.
March 12, 2023:
Signature Bank collapses. Facing a similar situation to SVB. The US Treasury Department announced that all depositors from both banks would be “made whole”, in fear of spillover into the broader banking industry.
What Happened
SVB had $212 billion in assets against $210 billion in liabilities. Of these $212 billion in assets, $55 billion were liquid. SVB invested heavily in long-term Treasury bonds during the pandemic when it experienced an influx in deposits and when rates were near 0. However, as inflation persisted, the Fed hiked rates at an extremely quick pace, 4.5% the past year. This significantly lowered the value of SVB’s assets. Normally, this would not be an issue. A US Treasury bond is widely regarded as one of the safest investments. If the bonds were held to maturity, a significant drop in the market value would not affect the assets’ true value. Except, SVB did not get the opportunity. Amid choppy market conditions, the bank was forced to perform a $21 billion fire sale of its long-term securities, losing $1.8 billion in the process, spooking depositors and investors. Paranoia spread like wildfire, and the rest was history.
Causes
A multitude of different factors combined to form a perfect storm, and it would be foolish to pin the blame on any single one of these factors. Rather, it seems that an extremely unfortunate combination of the state of the US economy, poor risk management, and the influence of social media all played a critical role in the swift unraveling of SVB.
First, persistent inflation and delayed action by the Fed in 2021 to combat inflation resulted in the rapid rise of interest rates in late 22-23. In previous paragraphs, I’ve already gone relatively in-depth on this issue and how it affects SVB.
Second, SVB’s poor assessment and management of duration risk in its portfolio. While every investor has heard of the age-old wisdom to diversify, it is surprising but expected that the bulk of the bank’s $55 billion in liquid assets were invested in T-bonds. The risk of such a portfolio is obvious, the money will not be accessible for upwards of 10 years. But clearly, the decision-makers at SVB knew about this. This investment was more of a bet that interest rates would remain stable because the alternative explanation, that the bank believed it would not need the money for such a long period, is simply absurd, given the total size of the company’s assets. So what seems to be a stable, risk-minimal investment is a sizable bet on low US interest rates, as that primarily affects the price of Treasury bonds. If this is the case, it is impossible to treat this investment as the typical, risk-free Treasury bond (whose risk is measured given the assumption the bond is held to maturity), because there is a very good chance the bank would need the money before the bonds matured. If these bonds were treated as a regular investment rather than a risk-free one, diversification would have made sense and been very useful.
Third, the impact of social media. SVB was unlike any traditional bank run. The difference was speed. While bank runs in the past, such as in the Great Depression, tended to drag on for days, the fiasco at SVB was over in 48 hours, from start to finish. This small time frame gives very little time for the bank to react and adopt damage control measures. Social media is certainly a factor, but what compounded the issue was SVB’s monopoly in the startup industry. “It’s a small world”; that phrase holds particularly true in this instance, where a few big venture capital firms control most startup funding. Once word starts to spread within the inner circle, all the venture capitalists asked their clients to withdraw their funds. The $173 billion in deposits were essentially controlled by a select few people, which effectively meant they were the lifeline tied to SVB.
Ultimately, SVB’s collapse is a perfect example of everything going wrong that could have went wrong. Although the story is quite tragic, banks are now more aware of the specific causes to SVB’s problems, including duration risk and the impacts of social media on a bank run.
