What happened to Silicon Valley Bank?

1.0 What is Silicon Valley Bank?

Silicon Valley Bank, abbreviated as SVB, was the 16th largest bank in the United States before it failed. SVB was founded in 1938 and is headquartered in Santa Clara, California. Most of its clients are high-tech companies in Silicon Valley, such as Microsoft, Google, etc, which means SVB has a significant position in the technology industry. SVB is the first choice of bank for the technology sector as they support start-ups, since not all banks are receptive due to the high risk involved. In addition, SVB is well known as a source of private banking, personal credit lines and mortgage lending to technology entrepreneurs and provides about half of the financing for US venture capital-backed technology and healthcare companies. The bank’s last call report in 2022 said that as of December 31, 2022, SVB had total assets of $209 billion and total deposits of $175.5 billion, estimating that $151.6 billion (86.4%) was uninsured (Federal Reserve Statistical Release, 2022).

2.0 Why did SVB collapse?

2.1 Interest rate increase

Banks make money by using their deposits to invest and gain benefits from them. Normally, there are two types of investments that banks make, those with high risk and high return and those with low risk and low return. In the case of SVB, its high-risk investments are based on investments in start-ups, while its low-risk investments are based on the purchase of US bonds to ensure that no substantial losses are incurred. However, bonds and treasury values fall when interest rates increase. In 2022, the Federal Reserve increased the interest rate to combat inflation, which shrunk the price of SVB's bond holdings. Banks typically aim to maintain a balance between short-term liabilities (such as customer deposits) and short-term assets (such as loans) to ensure they can meet their financial obligations promptly. This approach allows them to quickly liquidate assets if needed to cover any sudden liability demands. If a bank shifts its investment strategy towards long-term securities, such as treasuries, it may indicate a desire for higher yields or a more stable income stream. However, relying heavily on long-term securities can pose challenges if the bank faces liquidity needs. Long-term securities are not as easily converted to cash as short-term investments, and selling them prematurely may result in losses if the market conditions are unfavourable. Silicon Valley Bank used to make short-term loans. However, in 2021, they turned to long-term securities such as Treasuries for higher returns, and they did not protect their liabilities with short-term investments for quick liquidation. They have been insolvent for months because they could not liquidate their assets without incurring huge losses (Hetler, 2023). At the same time, some of Silicon Valley Bank's customers were experiencing financial difficulties causing a number of people that began withdrawing funds from their accounts. To accommodate these large withdrawals, Silicon Valley Bank decided to sell some of its investments with huge losses. SVB lost US$1.8 billion, which marked the beginning of the bank's collapse.

2.2 Bank Run

Bank runs are when customers of a bank withdraw their deposits due to concerns about the bank's solvency, which is one of the reasons causing SVB’s failure. On March 8, 2023, Silicon Valley Bank announced a $1.8 billion loss on its bond portfolio, along with plans to sell common and preferred stock to raise $2.25 billion (SVB Financial Group, 2023). When this information was published, people began to fear that the bank was short of funds and customers started to withdraw money in waves. Unlike personal banking, SVB's customers had accounts on a much larger scale. During the bank run, it didn't take long for SVB's funds to reduce and the pace of withdrawals continued to accelerate, creating a snowball effect that led to SVB's failure. Eventually, the California regulator announced on March 10, 2023, that SVB had closed the bank and placed it under FDIC supervision (Hetler 2023).

3.0 What is affected by the collapse?

SVB’s failure hit large tech companies, stockholders and investors a lot since they are not backed enough by insurance. The Federal Deposit Insurance Corporation (FDIC) provides separate insurance coverage for deposits. The standard amount of insurance is $250,000, meaning that depositors may be eligible for insurance above $250,000 if they have funds in different ownership categories and meet all FDIC requirements. If an account holder has funds in the same ownership category at the same bank, all deposits are added together and insured up to the standard coverage amount, which is $250,000. The large tech companies with significant cash in SVB including Etsy, Roblox, Rocket Labs and Roku belong to the second situation, which means they only can have $250,000 as coverage amount (FDIC, 2023). However, most of the large tech companies at SVB have accounts with deposits of over $250,000. It indicates that most of the funds are uninsured. This issue caused these companies to have not enough deposits for immediate expenses such as payroll. To deal with this situation, on March 12, FDIC announced that it will provide additional funding to eligible depository institutions to help and ensure that banks have the capacity to meet the needs of all depositors (Board of Governors of the Federal Reserve System, 2023). Unfortunately, stockholders’ and investors’ investments are still not insured by FDIC (FDIC, 2022). In other words, individuals and institutions who owned stock in SVB Financial Group may not get their money back.

4.0 Consequence: First Citizens makes a huge gain on the SVB deal

SVB is now a division of First Citizens Bank. First Citizens Bank is a famous financial institution based in the US, operating as a commercial bank and offering a comprehensive range of financial services to individuals, businesses, and organizations. As announced on March 26, all of the assets from SVB were purchased by First Citizens except for $90 billion of securities and other assets were still in control of FDIC, which means First Citizens can be close to Silicon Valley and future tech investments (FDIC, 2023). Additionally, it will further expand its reach in California and position itself to gain access to SVB's clients in the technology sector.

5.0 The Lehman moment happens again?

The collapse of SVB won’t lead to the Lehman moment again like in 2008. There is a fundamental difference between the reasons that these two phenomena occurred. Primarily, Lehman Brothers is an investment bank instead that SVB is a commercial bank. While it is true that the Lehman moment caused many financial institutions to suffer losses as a result of their unsuccessful investments in US housing sector debt, the situation was not the same then as it is now. At the Lehman Moment, financial institutions were facing depletion of interbank lending and were unable to borrow money even when interest rates were effectively zero. This was because the assets they held came under severe credit losses (Wiggins, Piontek and Metrick 2019). For SVB, because the securities sold were issued or backed by the US government. Therefore, although the increase in interest rate undoubtedly hurts the mark-to-market value of these debt instruments, they are still profitable. Consequently, this is very different from the systemic liquidity crunch in the whole banking sector caused by the Lehman moment in 2008, with the problems caused by the SVB collapse being more confined to a minority of banks. In other words, the scale of the impact of the SVB collapse was far less than that of the Lehman Moment, as most of the US banks were generally in good financial condition and were able to see another bank step in and purchase SVB's assets, enabling depositors to be protected. But from my perspective, while the collapse of SVB cannot cause the Lehman moment to happen in the economy again, it can be seen as a kind of Lehman moment of the fintech sector. Before its collapse, SVB was considered a reliable source of funding for technology start-ups and venture capital firms. Many technology companies need access to funds to pay their employees. However, with the collapse of SVB, many of their balances are on SVB, causing difficulties in paying salaries.

6.0 Conclusion

Overall, SVB, as the 16th largest bank in the United States, its collapse was mainly caused by the Federal Reserve raising interest rates and bank runs. This collapse also has brought fluctuations to the economy, especially in the fintech sector. SVB's investors and shareholders experienced huge losses from this. However, it ended with the takeover by First Citizens Bank. The collapse of SVB did not lead to a liquidity crisis like the Lehman moment in 2008, but it did have a significant impact on technology companies.

Article was prepared by Tu Yizhi.

References:

Board of Governors of the Federal Reserve System, (2023). Joint Statement by Treasury, Federal Reserve, and FDIC [online]. [Viewed 7 July 2023]. Available from: https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm

FDIC, (2023). Deposit Insurance FAQs [online]. [Viewed 7 July 2023]. Available from: https://www.fdic.gov/resources/deposit-insurance/faq/index.html

FDIC, (2022). Financial Products That Are Not Insured by the FDIC [online]. [Viewed 7 July 2023]. Available from: https://www.fdic.gov/resources/deposit-insurance/financial-products-not-insured/index.html

FDIC, (2023). First-Citizens Bank & Trust Company to Assume All Deposits and Loans of Silicon Valley Bank N.A., From the FDIC [online]. [Viewed 7 July 2023]. Available from: https://www.fdic.gov/news/press-releases/2023/pr23023.html

FDIC, (2022). Large Commercial Banks, FRB: Large commercial banks [online]. [Viewed 7 July 2023]. Available from: https://www.federalreserve.gov/releases/lbr/current/

Hetler, A., (2023). Silicon Valley Bank collapse explained: What you need to know [online]. WhatIs.com. [Viewed 7 July 2023]. Available from: https://www.techtarget.com/whatis/feature/Silicon-Valley-Bank-collapse-explained-What-you-need-to-know#:~:text=SVB%20didn't%20have%20the,of%20assets,%20the%20bank%20collapsed.

SVB Financial Group, (2023). SVB Financial Group Announces Proposed Offerings of Common Stock and Mandatory Convertible Preferred Stock [online]. [Viewed 7 July 2023]. Available from: https://ir.svb.com/news-and-research/news/news-details/2023/SVB-Financial-Group-Announces-Proposed-Offerings-of-Common-Stock-and-Mandatory-Convertible-Preferred-Stock/default.aspx

Wiggins, R. Z., Piontek, T. and Metrick, A., (2019). The Lehman Brothers Bankruptcy A: Overview [online]. [Viewed 7 July 2023]. Available from: https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=1000&context=journal-of-financial-crises