Table of Contents
- SVB Company History
- Why did Silicon Valley Bank Collapse?
- What other banks are collapsing?
- Will SVB receive a bailout?
- What will happen to the SVB customers?
- Can this happen to your bank?
- Does this relate to the 2008 housing crash?
- What should you do?
- In 1983, SVB was founded.
- In 1983, they were structured as a traditional banking institution by offering basic lending services. It soon after expanded to VC (venture capital) to serve early-stage high-growth companies. This expansion proved to be highly lucrative over the following decades.
- In 1987 they went public.
- In 1992 they were hit by the real estate bust in the US and the company recorded a $2.2M loss.
- In the mid-1990s they provided early VC funding to Cisco and Bay Networks. In 1995, Cisco’s stock was around $2. In 2005, the stock reached $20, a 900% total return and 25% annualized return over 10 years. In 1998 Nortel bought Bay Networks for $9.1B. Both investments proved to be massive payouts.
- In 2000, SVB’s stock soared from $20 to $70.
- In 2000, SVB’s stock crashed 50% due to the dot-com bubble and a large allocation in tech startups.
- In 2004, they opened locations in India and the UK. The India location is now a non-banking subsidiary as it’s primarily an IT and office support division.
- As of 2021, they have invested in 50% of all VC-backed tech and life science companies in the US.
Here are three reasons why the bank crashed. Keep in mind, there are other reasons involved but these are the top three.
1. No cash – Due to the Federal Reserve raising interest rates, deposits (cash flow in) and lending (cash flow out) have slowed down. This caused a domino effect. Domino #1: SVB primarily serves tech companies. This includes both private and public tech companies. Many of which are private high risk tech companies. The majority of the investors (venture capitalists) making investments into SVB also primarily focus on tech. Because those deposits slowed down, this means SVB doesn’t have capital which means if SVB doesn’t have cash flowing in, it can’t provide loans or investments. This leads to domino #2: Banks generate significant revenue from lending money. If a bank can’t lend money, it can’t generate interest or in other words, revenue. Think of driving down a highway and your car runs out of gas and there are no gas stations in front of you or behind. You are stuck!
2. Selling bonds for a loss – Due to the Federal Reserve raising interest rates, the price of long-term bonds have fallen. Interest rates and bonds have inverse relationships. When interest rates go down, the price of bonds go up. When interest rates go up, the price of bonds go down. When someone buys bonds, they give their money to a bank for a fixed rate of return over the term of the bond. To use simple math, let’s say an investor buys a bond for $1,000 with a 10-year maturity and an interest rate of 2%. The investor will receive $20 every year for 10 years. After 10 years, they get back their $1,000. If interest rates go down and bond prices go up, you can make more money by selling your bond before maturity. In other words, you can sell before the 10 years are up and cash in! However, if you flip that scenario and interest rates go up and bond prices go down, this means if you sell early, you will sell at a loss. This is exactly what is happening with SVB. SVBs $21B bond portfolio was yielding 1.79% and as of early March 2023, the 10-year Treasury yield is about 3.9%. Overall, those who still hold bonds at 1.79% are now underwater and are selling at a loss, in droves!
Here is an example of the math. Bond calculator found here.
- Par Value (How much you lent to the bank): $10,000
- Coupon Rate (The interest rate at the time you lent $10,000 to the bank): 1.9%
- Market Rate (T current interest rate): 3.9%
- Years to Maturity: 10
- If you sell today, how much will you get back: $8,280
- In this case, you lose $1,720 or 17.2%.
3. Bank Run – As quoted by Investopedia “A bank run occurs when a large number of customers of a bank or other financial institution withdraw their deposits simultaneously over concerns of the bank’s solvency. As more people withdraw their funds, the probability of default increases, prompting more people to withdraw their deposits. In extreme cases, the bank’s reserves may not be sufficient to cover the withdrawals.” The previous two points lead up to this single event. SVBs depositors and investors tried to bank run $42B out of their accounts in one day.
Some of the other questions you may have include:
This article from nytimes.com highlights that Signature Bank is closing its doors. Signature Bank is highly focused on real estate lending but also made a big play in crypto. On Friday, March 10th, 2023, Signature Banks customers withdrew more than $10B in assets which caused the bank to close. As quoted in the article “Its closing underscores the challenges that face small and midsize banks, which often focus on niche lines of business and have a narrower base of customers than Goliaths like JPMorgan Chase or Bank of America. That leaves them especially vulnerable to old-fashioned bank runs.”
This article from forbes.com states that Silvergate also experienced a massive bank run. After they delayed their financial report by a week, they announced they would wind down operations. Silvergate primarily focused on crypto.
This article from cnbc.com lists several banks that are seeing a share price drop. This doesn’t mean customers are withdrawing cash, it means investors are losing confidence. Some of the banks listed include First Republic, PacWest, Western Alliance, and KeyCorp.
Based on this article from thehill.com, published the morning of 3/13, President Biden said “No losses will be — and this is an important for point — no losses will be borne by the taxpayers. Let me repeat that, no losses will be borne by the taxpayers.” In other words, taxpayers won’t pay for this. Instead, the money will come from the fees that banks pay into the Deposit Insurance Fund. Treasury Secretary Janet Yellen ruled out a bailout possibility for the bank’s owners and investors, saying in the aftermath of the 2008 banking crisis that “we’re not going to do that again.”
This article from pbs.org states the FDIC (Federal Deposit Insurance Corporation) is now running SVB. As stated within the article, for depositors with $250,000 or less in cash at SVB, the FDIC said that customers will have access to all of their money. For those with uninsured deposits at SVB – anything over the FDIC limit of $250,000 – they may or may not receive back the rest of their money. These depositors will be given a “Receiver’s Certificate” by the FDIC for the uninsured amount of their deposits. The FDIC has already said it will pay some of the uninsured deposits by next week, with additional payments possible as the regulator liquidates SVB’s assets. But if SVB’s investments have to be sold at a significant loss, uninsured depositors may not get any additional payment.
Maybe. If you bank with a sector or asset-class-focused bank like SVB, Signature, or Silvergate, you should look to withdraw funds and deposit into a larger well diversified institution. In other words, if your bank only focuses on tech or crypto, you might want to get out. However, if you do keep your assets with a large bank like JPMorgan Chase or Bank of America, you should be okay.
No. The crash of 2008 was caused by junk mortgage-backed securities. Banks were bundling together garbage mortgages, and selling them to investors. In short, people who were not qualified to take out mortgages were receiving loans, and those mortgages were bundled together and sold to investors. As mentioned in this article from nytimes.com, Washington Mutual was the largest US bank to collapse in 2008, followed by investment banks Lehman Brothers and Bear Sterns. From 2008 – 2015, more than 500 federally insured banks failed.
1. Don’t freak out – If you keep your cash with a large well diversified bank, you should be fine. Personally, I bank with JPMorgan Chase and I’m not worried. However, If I had my money with a sector or asset-class-focused bank, especially in tech and crypto, I would be withdrawing everything.
2. Keep an eye on the Fed – The main objective is to drive down inflation which means we have to keep increasing interest rates. This strategy brought us out of the 1980 – 1982 “Great Global Recession” where inflation hit close to 15% in 1980. For context, in June of 2022 we were at 9% and as of March of 2023, we are at 6.4%. We are on the decline which is a great sign. Because of these recent bank closings, the fed may get more pressure to “lay off the gas pedal” and stop raising interest rates. We can’t think short-term if we want to get out of this. The Fed needs to keep increasing rates to drive down inflation.
3. Keep an eye on other banks – SVB, Signature, and Silvergate may just be the beginning of a domino effect. As mentioned above, between 2008 and 2015, more than 500 banks also failed. These banks were likely involved in selling junk mortgage-backed securities. In this case, more customers may withdraw their cash if they lose confidence in their bank.
4. Lesson learned – What happened to SVB, Signature, and Silvergate is a major lesson learned to new banks, lending institutions, and fundraising apps. Don’t put all your eggs in one basket when you manage other people’s money.