The collapse of the Silicon Valley Bank (SVB) was a major financial event that had far-reaching consequences. The bank, which was founded in 1983 and specialized in providing venture capital to tech startups, experienced a dramatic setback on March 10, 2023, when the US FDIC seized the bank due to a crippling bank run and a swooning stock.
What really happened to SVB?
Silicon Valley Bank was ranked 20 on the Forbes list of the top banks in the world, having over $209 billion in assets. As the preferred bank for the tech sector, SVB’s services were in high demand throughout the pandemic years. The initial market shock of COVID-19 in early 2020 quickly gave way to a golden period for startups and established tech companies, as consumers spent big on gadgets and digital services. The low interest rate and excessive money printing from the US Federal Reserve also helped tech companies boom during this period and enjoy a healthy period of growth.
Nearly 50% of US tech startups deposited money in the Silicon Valley Bank. Most tech companies used SVB to hold their cash,leading to an influx of deposits in the SVB vault. The SVB deposit liability grew from $69 billion at the end of 2019 to $189 billion at the end of 2021.
SVB wanted to make a large profit from the numerous cash assets in their possession, so it decided to go with a safe investment of long-term bonds because they believed it was safer than investing in stocks and would provide a steady return. SVB invested $80 billion of their tech company deposit in long-term bonds and other securities with the aim of paying their deposit at a lower rate while earning high earnings from the long-term bonds with the aim of generating higher profit.
The shortcoming of SVB began in late 2021 when inflation began to rise in the United States, forcing the US Federal Reserve to increase interest rates at a very high rate in order to slowdown the economy, but it was so quick that it didn’t give time for the markets to adjust. With this situation, the SVB’s long-term bonds started losing value, making them a sitting dock of risk. During this period, tech startups were struggling to get financing as the interest rate was really high, forcing them to withdraw their money in order to fund ongoing projects. With startups as their main source of customers, SVB’s deposit was decreasing, falling from $189 billion in 2021 to $173 billion in 2022. As more of their customers started making withdrawals, SVB had no other option but to sell their long-term bonds at a loss in order to meet up with the numerous deposits.
On March 8, 2023, SVB made a bombshell announcement that they were selling off their entire liquid bond portfolio, worth over $21 billion, and at this time, the long-term bond prices were still devalued. For one bond sold, SVB took a $1.8 billion loss. With this, the investor became scared about their investment in SVB, making them withdraw all their capital from SVB. By the end of March 9, 2023, investors had withdrawn a total of $42 billion, leaving SVB with a negative balance of over $958 million.
Analyst intake on SVB failure
Speaking with Mr. Kunle Alonge, a financial expert and the MD of Sonora Capital Investment, one of Nigeria’s top financial and investment firms, about his thoughts on the demise of Silicon Valley Bank,
Mr. Kunle pointed out that SVB’s collapse was primarily attributed to its lack of diversification as it focused heavily on providing services exclusively to technology companies, which is also known as niche marketing.
In his words, “SVB’s collapse was primarily attributed to its lack of diversification as it focused heavily on providing services exclusively to technology companies, which is also known as niche marketing.” This decision left them vulnerable when those same tech companies began experiencing financial difficulty, which caused a rapid decline in SVB’s assets and ultimately its demise.”
He also pointed out another challenge faced by SVB, which was asset mismatch. “This was due to the large influx of deposits from technology companies backed by venture capital that were making large profits during the COVID-19 period. The SVB deposit liability grew from a range of $69 billion to $189 billion within the COVID-19 period. This had a crucial implication for the SVB, which was that they could not create assets quickly as the liabilities came in, leaving them no choice but to invest in long-term bonds called hold-to-maturity securities with a duration of almost ten years. This resulted in a mismatch, which was taking short-term deposits to create a long-term asset of ten years.” He said.
According to Mr. Kunle, the last primary reason that caused the failure of the SVB was the hike in interest rates by the US Federal Reserve. He explained that the “US Federal Reserve raised the interest rate on a 25-point basis, making most startup tech companies not be able to raise initial public offerings as fast as they used to, causing them to burn out their cash from SVB, which made SVB have to start selling their long-term bonds at a billion-dollar loss to meet up with their customers’ deposits.”
Mr. Kunle concluded in his analysis that SVB was not prepared for the sludge of deposits pumped into their possession during COVID-19.
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