SVB was the 16th largest US bank up until its collapse in March 2023. The fall of SVB is regarded as the 2nd largest banking failure in the history of the US. The collapse led to global markets being rattled, other bank closures and endangered new tech startups[i] which relied heavily on SVB.
What was SVB?
As the name suggests, SVB was a bank which served tech startups based around Silicon Valley. Half of the US’s technology based companies were relying on SVB for their banking services. Examples of famous companies which piled millions into SVB included: ROBLOX, Roku, Eiger and Rocketlab.
A lot of the clients of SVB would typically be deemed as ‘risky’. This is because a lot of these technology based companies advance and develop quickly, leading to fast and unpredictable movements of capital.
What was the Dodd Frank act and how could it have saved SVB?
After the 2008 Financial Crisis, President Obama signed the Dodd Frank Act. This act ensured that banks such as SVB faced stricter regulation to prevent another crisis.
During the Trump administration, some of these regulations on smaller banks were removed in order to ‘liberate small banks from excessive bureaucracy … to release economic potential’. This meant that banks faced less regulatory pressure when their assets were worth under $250billion (including SVB at the time).
This is one argument for why SVB collapsed as easily as it did, from 2018 onwards, they were facing much less scrutiny.
How did COVID affect SVB?
During the COVID pandemic of 2020, SVB was flooded with cash as deposits soared. Deposits tripled in the space of two years to $189billion. With this cash, SVB bought billions of dollars’ worth of long-term US bonds[ii] and government backed mortgage securities[iii]. These are usually seen as ‘safe’ financial products as they’re government backed.
How did changing interest rates affect SVB?
After purchasing all these bonds, US interest rates began to rise. As bond prices have an inverse relationship with interest rates, this meant that bond prices began to fall.
As SVB was holding a lot of bonds, this meant that they were sitting on a massive loss of $17billion. To make matters worse, deposits were also falling, exposing SVB to the beginning of a liquidity crisis.
Most of the bank’s deposits were held in just 37,000 accounts, which were holding more than $250,000 (the amount insured up to by the FDIC[iv]).
What happened on March 8th?
On March 8th, SVB entered a regulatory filing, announcing that it had sold a large amount of its securities at a $1.8billion loss to help it cover the fall in the amount of deposits being made.
This spelled the beginning of the end for SVB. The stock began to plummet, and startups were being asked by worried venture capitalists[v] to withdraw their money from any SVB accounts before it was too late.
As panic spread, there was a run on the bank and withdrawals exceeded $42billion. As the stock price fell off a cliff, SVB ran out of cash.
What did regulators do?
As startups feared that they wouldn’t be able to withdraw their deposits, regulators seized the bank. The FDIC claimed that clients would have access to their insured deposits in no less than 3 days. However, SVB had over $151billion of uninsured deposits.
Luckily, on Sunday March 12th, regulators announced that even uninsured deposits over $250,000 would be able to be withdrawn.
What made SVB inherently vulnerable?
Due to SVB’s close links with Silicon Valley and tech startups, SVB’s performance is closely tied with this one industry.
As this industry has typically ‘flighty deposits’, if there is any fear about the safety of the deposits or if the companies need quick access to their deposits, the bank must be as liquid as possible in order to survive.
As SVB was hit by an unprecedented run on the bank at the same time as falling prices of long-term investments and bonds, it was a perfect storm which caused its collapse.
Footnotes:
[i] Tech Startups - New companies that have large amounts of debt and are deemed as high risk.
[ii] Bonds - Debt instruments which are similar to IOUs.
[iii] Government backed mortgage securities - A bundle of home loans bought from the banks that issued them.
[iv] FDIC - Federal Deposit Insurance Corporation.
[v] Venture Capitalists - Investors that invest in early-stage companies in exchange for equity.
Bibliography:
WSJ – What Happened With Silicon Valley Bank?
CNN - Why Silicon Valley Bank collapsed and what it could mean
