Silicon Valley Bank (SVB) has been a stalwart institution supporting the technology, startup and venture capital community for nearly 40 years. Nearly every major tech company or venture capital firm has worked with SVB at some point. On Friday, the Federal Deposit Insurance Corporation (FDIC) announced it was placing SVB into receivership as the bank faced collapse. The fallout continued over the weekend when the FDIC also had to take control of Signature Bank, citing systematic risk. By this morning (March 13th), HSBC has announced it will move to by SVB’s UK arm, so the situation is developing rapidly and what looks increasingly likely is that how things play out in the US (with regards to a potential rescue or other possibilities) may well be different to what happens in other jurisdictions.
When SVB’s collapse was initially announced last week, there was uncertainty about SVB’s depositors being able to access their funds, but by Sunday evening, The Fed announced it would backstop both institutions, guaranteeing depositors’ funds and shoring up the financial system in a bid to quell fears of an all-out banking crisis.
The repercussions of SVB’s collapse will be far-reaching given many (if not the majority of US startups) bank with SVB, and there will undoubtedly be a ripple effect on the tech ecosystem.
So, how did SVB get here? What will happen next? And what can we learn from it all?
What Happened To SVB?
In short: A bank run. After releasing it’s mid-quarter update in which SVB announced large losses and a capital raise, SVB’s stock lost 60% of its value in one day. Depositors (VCs, and startups) panicked, withdrew deposits stock fell further 60% before being halted completely. On the Friday 10th March, the FDIC announced it was placing SVB into receivership, taking control of the bank.
A bank’s fundamental business is “maturity transformation”: they borrow on a short-term basis (deposits) and lend on a longer-term basis (or buy bonds) and capture the spread between their cost of borrowing and the interest they earn on the loans or bonds. They make money by leveraging the deposits they receive from their customers to invest elsewhere. This, of course, is generally a good business model as long as the bank properly manages the risk on their longer-term investments. However, SVB’s mid-quarter update showed they did not manage that risk well.
The depositors at SVB (startups and investors) have been under stress for a while now. Cash has been hard to come by and the market has not been kind to unprofitable growth companies. Because SVB’s customers have been under stress, they’ve needed their cash, depleting deposits at SVB. In essence, little cash was coming in to SVB during this tough market environment, while cash was going out.
After SVB’s mid-quarter update, and despite its troubles, the bank seemed to have a good liquidity position. However, the mid-quarter update was the straw that broke the camel’s back. Depositors and the market got worried about SVB’s financial health, and many prominent venture capitalists advised their portfolio companies to withdraw their cash from SVB. That only exacerbated the problem depositors panicked as they saw other depositors extracting their capital and they rushed to do the same: the run had begun.
To fund the withdrawals, SVB had to sell assets. The assets it had onhand to sell were longer-dated bonds (a maturity mismatch). Bonds are loans, and loans typically have an interest rate and a maturity date. Upon maturity, the principal balance is due. Along the way to maturity the owner of the bond (the lender) receives interest payments. Bond prices move inversely with interest rates. When rates rise, the value of contractual fixed interest payments become relatively less attractive because now you can get higher interest elsewhere. Who would pay $100 for a bond that pays 2% interest when you can buy a bond that pays 3% interest for $100? When rates fall, the opposite is true. The longer the bond’s maturity, the more sensitive it is to interest rate changes. As interest rates rose, the bonds held by SVB decreased in value. The more depositors fled SVB, the more bonds they had to sell at a loss to meet the withdrawal demands. You can see where this is going. To borrow a term from recent crypto happenings, it was a bit of a “death spiral”.
What's Going To Happen Next, And How Will Depositors Be Affected?
As of December 31, 2022, SVB had assets of approximately $209 billion and $175.4 billion in total deposits. The value of those assets now is unknown. However, with the backstop announcement on Sunday, the FDIC effectively moved to guarantee SVB’s depositors’ funds – a relief for many and a move watched closely around the world as everyone from governments to startups and retail investors tried to grasp how serious and far-reaching the fallout would be. The FDIC are looking to prevent a disorderly liquidation of SVB (and now Signature bank), instill and, ultimately, stave off a wider run on banks by giving confidence into the liquidity of the US banking system.
The full extent of the ripple effects through the tech and banking ecosystem are still to be determined, though some immediate impacts are already happening. One thing that’s for sure is that a lot of startups and VCs are going to become much more familiar with banking and bank regulations.
This is a developing story – as the situation unfolds, we will make further updates and provide more insight.
The views and opinions expressed in this piece are those of the author. They do not constitute advice or a recommendation, nor do they necessarily reflect the official policy or position of Enness. Views and opinions expressed are not intended to indicate any market or industry viewpoints, or those of other industry professionals.
