What SVB’s Failure Means for the Bank and Its Clients: QuickTake

Regulators have long warned that the end of rock-bottom interest rates could cause sudden crises in unexpected corners of global finance. So when Silicon Valley Bank (SVB) in the face of a funding crunch, investors wondered if its plight was a harbinger of broader trouble. Major banks are much better capitalized than they were before the global financial crisis, and SVB’s deposit base was unusually concentrated in venture-backed startups. But the in bank shares that followed SVB’s woes reflected worries that the ripple effects of interest-rate hikes could hurt at least the most vulnerable lenders, and prompted an emergency package of support from US regulators.

1. What befell SVB?

As the only publicly traded bank focused on Silicon Valley and new tech ventures, SVB was deeply embedded in the US startup scene. According to its website, it did business with nearly half of all US venture capital-backed startups and 44% of US venture-backed tech and health-care companies that went public last year. Its website lists Shopify, VC firm Andreessen Horowitz and cybersecurity firm CrowdStrike Holdings among its clients. On March 8, its parent company, SVB Financial Group, announced it had sold $21 billion of securities from its portfolio at a loss of $1.8 billion and would sell $2.25 billion in new shares to shore up its finances. That unnerved a number of prominent venture capitalists, including Peter Thiel’s Founders Fund, Coatue Management and Union Square Ventures, which were said to have instructed their portfolio businesses to pull their cash from the bank. By March 10, the effort to raise new equity or find a buyer had been abandoned, and the bank was put into receivership by the Federal Deposit Insurance Corp.

2. What does that mean for SVB and its clients?

The FDIC that it had created a new bank, the Deposit Insurance National Bank of Santa Clara, to hold the assets of SVB. It said that insured depositors — those with $250,000 or less in their accounts — would have access to their money starting March 13. Receivership typically means a bank’s deposits will be assumed by another healthy bank, or the FDIC will pay depositors up to the insured limit. Typically, the FDIC sells the assets of a failed bank to other financial institutions and pays those with uninsured deposits out of those proceeds. Uninsured depositors will get a receivership certificate for the remaining amount of their uninsured funds, the regulator said, adding that it doesn’t yet know that amount.

3. Could a buyer emerge?

HSBC Holdings Plc bought the UK arm of SVB for a symbolic for ?1. The Bank of England said “all depositors’ money with SVB UK is safe and secure as a result of this transaction.” SVB’s parent company was said to be exploring a sale of other assets. In the depths of the global financial crisis 15 years ago, US regulators set a precedent by arranging the distressed sales of Bear Stearns Cos. and Merrill Lynch & Co. to JPMorgan Chase & Co. and Bank of America Corp., respectively. But those failed banks were considered systemically important because of their debt obligations to other banks; it’s not clear that SVB would get the same treatment.

4. Why did SVB prove so vulnerable? 

Several factors came together to cause its distress. Some of those are unique to SVB, while others are the source of broader worries in banking. Behind most of them are the rapid interest-rate increases pushed through over the last year by the US Federal Reserve to tame the highest inflation in decades. One consequence of those hikes that hit SVB especially hard was the sharp downturn in the high-flying tech companies that had been the source of its rapid growth; most banks have broader customer bases. As venture capital dried up, SVB’s clients tapped their deposits to withdraw cash they needed to keep going. 

5. What happened after those withdrawals? 

To keep up with the wave of withdrawals, SVB had to sell assets — including, crucially, bonds that had lost a substantial portion of their value. That produced $1.8 billion in losses that wouldn’t have hit the bank’s balance sheet had the bonds been held to maturity. Here, too, SVB’s funding structure had made it particularly vulnerable. All US lenders park a chunk of their money in Treasuries and other bonds, and the Fed’s hikes made those existing bonds less valuable because of their low yields. But SVB took it to a different level: Its investment portfolio had swelled to more than half its total assets, far above the norm. 

6. Why are there fears of contagion?

SVB’s collapse came two days after the abrupt shutdown of Silvergate Capital Corp. While the two cases are mostly unrelated, there were similarities. At Silvergate, the issue was a run on deposits that began last year, when clients — cryptocurrency ventures, primarily — withdrew cash to weather the collapse of the FTX digital-asset exchange. The withdrawals forced asset sales that locked in losses, as happened with SVB, leading Silvergate to announce it was closing its doors. Then two days after SVB’s collapse, regulators swooped in to close another crypto-friendly bank, New York’s Signature Bank, underscoring the urgency of efforts to backstop the nation’s banking system. Before all that, US bank stocks were under pressure after KeyCorp, a regional lender, warned about mounting pressure to pay savers more. As interest rates rise, depositors can switch to banks offering higher rates. Banks can either raise their own rates, cutting into profits, or face the prospect of a scramble to shore up their funding base if depositors leave. On March 12, US regulators stepped in.

Read more: What the US Is Doing to Avert a Bank Crisis and Why: QuickTake

7. Did anyone see this coming?

Concern had been mounting about the impact of rising rates on bank balance sheets. While rising rates buoy banks’ revenue, in the short term they also force them to write down the value of assets they hold. In all, US banks had booked $620 billion in unrealized losses on their available-for-sale and held-to-maturity debts at the end of last year, according to filings with the FDIC. The agency noted in March that those paper losses “meaningfully reduced the reported equity capital of the banking industry.” As recently as January, SVB Chief Financial Officer Daniel Beck told investors there wasn’t “any desire” for a wholesale change in the bank’s available-for-sale portfolio. That all changed this month. 

The Reference Shelf 

• Bloomberg Opinion’s Shuli Ren says Washington financial regulators have created a blind spot in an otherwise sound financial system.
• A Big Take on the SVB crisis and systemic risk in the tech money machine
• A look at what went wrong at Silvergate