What Happened to Silicon Valley Bank?

Silicon Valley Bank has been in the headlines everywhere you look over the last few days. We have a lot to say on this topic, but will be as brief as possible today while taking a look at what happened.

Silicon Valley Bank was the go-to bank for tech startups, as well as crypto and venture capital firms. They were one of the 20 largest banks with $212 billion in assets as of Dec 31, 2022.

Deposits at the bank exploded from $61 billion at the end of 2019 to $189 billion at the end of 2021. Most of this growth occurred in 2021 when free money was raining down. This came from the Fed, which kept short-term interest rates at near 0% and also injected $1.5 trillion into the financial system in the form of purchasing Treasury bonds and mortgage-backed securities. The Treasury was also sending out stimulus checks and reducing issuance of Treasury bonds, which provided another $1.7 trillion in liquidity.

In 2021 with short-term interest rates near 0%, and deposits soaring, SVB did something similar to what the Fed was doing - they loaded up on duration (read longer-term Treasuries and mortgage-backed securities) in a search for a higher yield.

It is important to note that even as late as November 2022, the Federal Reserve was projecting just .25 - .50% in rate hikes for 2022. However, the Fed ultimately raised rates by 4.50% in just ten months beginning in March 2022, much higher than they were projecting throughout 2021. The Fed had no choice but to raise rates aggressively due to the out-of-control inflation that their easy money policies helped cause. We have written about this many times on our blog so we won’t spend more time on it today.

Back to Silicon Valley Bank - the rapid increase in interest rates meant SVB suffered significant unrealized losses on the bonds they had purchased in 2021. If SVB could have held the securities until their maturity they would not have had to realize the losses.

However, SVB’s highly concentrated customer base had been burning cash of late and was withdrawing deposits from the bank. Last Wednesday SVB announced a plan to raise $2 billion in capital to help offset the losses from the bond sales. This letter led to a 60% decline in SVB’s stock on Thursday. What came next was a massive bank run. From Bloomberg:

The run was sparked by a letter that Silicon Valley Bank Chief Executive Officer Greg Becker sent to shareholders Wednesday. The bank had suffered a $1.8 billion loss on the sale of US treasuries and mortgage-backed securities and outlined a plan to raise $2.25 billion of capital to shore up its finances.

Customers immediately tried to pull their money, including many of the venture-capital firms the bank had cultivated over decades. The withdrawals initiated by depositors and investors amounted to $42 billion on Thursday alone, according to the regulator. Despite being in sound financial condition prior to Thursday, the California watchdog said the run “caused the bank to be incapable of paying its obligations as they come due,” and it was now insolvent.

On Friday the FDIC stepped in and closed down SVB as the bank had become insolvent. The FDIC insures all accounts nationwide up to $250k per account. 90% of SVB’s deposits were above that threshold making them uninsured. So over the weekend the Treasury, Federal Reserve, and FDIC announced a series of measures to try to minimize the damage stemming from Friday’s closure of SVB, by among other things, guaranteeing all deposits at SVB, not just those under the $250k threshold.

For many decades Silicon Valley Bank had a great reputation and played a key role in helping fund many tech companies that would go on to become great innovative companies. Unfortunately, management did make some poor decisions over the last two years that set the table for all that recently transpired. SVB’s shareholders were just wiped out due to the mismanagement. However, it is important to understand that the conditions that led to these mistakes were created by the Fed and Treasury. This weekend the bill came due for all the easy money.

What is interesting is that last Tuesday Fed Chair Jerome Powell had indicated a willingness to raise interest rates even higher than previous projections had indicated due to a very strong economy and a slowdown in the decline in inflation. On the heels of Powell’s testimony to Congress, Fed Funds futures were pricing in a cycle-high rate of 5.65% in December 2023. Today that rate has declined to 3.93%. That is a staggering drop in such a short period of time.

The decline in interest rates today led to gains in many tech stocks and bond funds. On the flip side, many regional bank stocks declined as investors want to hear that financial authorities will guarantee all deposits for them like they did for Silicon Valley Bank.

We will have more on the SIlicon Valley fallout later in the week, as well as take a fresh look at some of the strong economic data that has come out recently. And as always we are closely watching over client portfolios. Have a good evening.