Silicon Valley Bank, often referred to as the bank of startups, has collapsed, making it the largest US bank failure since the global financial crisis in 2008.
The collapse comes after shares in Silicon Valley Bank fell 60 per cent on Thursday, bringing its market cap down to just $6B.
On Friday, the California Department of Financial Protection and Innovation closed SVB and named the Federal Deposit Insurance Corp. (FDIC) as the receiver.
The collapse of Silicon Valley Bank, a key player in the tech and venture capital community comes after the failure of Silvergate Capital, which was primarily a lender to crypto companies.
As regulators prepare to shed light on what happens to Silicon Valley Bank’s deposits, a number of tech companies and wealthy individuals are unsure of what will happen to their money.
Here is how Silicon Valley Bank went from a prolific lender in the private market to now being compared to Lehman Brothers.
Bank of Startups
To understand how Silicon Valley Bank reached its current state, it is important to understand how banks work.
In simple terms, banks take deposits from people who have money and then offer that as a loan to people who need money.
While most banks focus on a diverse set of assets, SVB Financial, the parent company of Silicon Valley Bank, focussed only on startups and venture capital investors.
The pandemic saw all the tech companies generate a ton of cash and it led to a surge in deposits for SVB.
According to the Wall Street Journal, SVB’s total deposits skyrocketed from just over $60B at the end of first quarter of 2020 to just shy of $200B by the end of the first quarter of 2022.
While a traditional bank might have dispersed those deposits across various loan instruments, SVB’s customers didn’t need any loans because equity investors kept giving them money.
What did SVB do with its deposits?
With traditional loans out of the equation due to its client portfolio, SVB Financial turned to safer assets.
The bank of startups bought tens of billions of dollars of long-term US Treasuries and government-backed mortgage securities.
The securities portfolio of SVB rose from about $27B in the first quarter of 2020 to around $128B at the end of 2021.
While these are relatively safe investments with no risk of defaulting and most banks do have exposure to longer-term security investments, SVB’s exposure was too big and thus prone to failure.
Due to its huge exposure to longer-term securities, Silicon Valley Bank became exposed to interest-rate risk.
As interest rates go up, a traditional bank would have to pay more interest on deposits and get paid more interest on their loans as well, allowing it to profit from rising interest rates.
However, when interest rates go up, the market value of long-duration bonds goes down. In an asset-sensitive market, SVB became an outlier.
The unrealised losses on its securities portfolio at the end of 2022 jumped to more than $17B.
“Few other banks have as much of their assets locked up in fixed-rate securities as SVB, rather than in floating-rate loans. Securities are 56 per cent of SVB’s assets,” Robert Amstrong explains in Financial Times.
Inflows turn outflows
Apart from losing money on long-duration securities, SVB also saw its deposit inflows turn into outflows.
The tech industry has always been susceptible to interest rate hikes. Startups and tech companies thrive when the interest rate is low and when the interest rate goes up, their business could take a turn for the worst.
In the case of SVB, its customers suddenly stopped receiving liquidity in the form of venture capital investments, fundraising activities, IPOs, secondary investments, to name a few.
In fact, SVB’s clients started burning cash to support their business continuity and the deposits fell from nearly $200B at the end of March 2022 to $173B at year-end 2022.
The decline only accelerated with the bank forecasting its deposits would decline by a mid single-digit percentage in 2023.
What happens next?
In order to provide itself with balance-sheet flexibility and meet potential outflows, SVB sold a large chunk of its securities on Wednesday.
It sold $21B worth of securities at a loss of about $1.8B after tax. It also set out to raise about $2.25B in capital but it didn’t work.
The stock cratered in price and customers tried to withdraw $42B of deposits, about a quarter of SVB’s total. According to a filing by California regulators, SVB ran out of cash.
In a statement on Friday, the FDIC said that customers will have full access to their insured deposits no later than Monday morning.
However, the FDIC said it hadn’t determined the current amount of uninsured deposits yet.
SVB said it estimates the amount of deposits at its US offices that exceed the FDIC insurance limit to be $151.5B at the end of 2022.
The FDIC plans to issue something called a “receivership certificate” for the remaining amounts of uninsured funds. It may offer future dividend payments as the FDIC sells off the assets of SVB.
While the collapse of Lehman can be attributed to bad lending, the collapse of SVB can be attributed to misjudgement of deposits and duration of the treasury yields.
Silicon Valley Bank bailed out by US regulators
In a surprise turn of events over the weekend, the US regulators announced a bailout for Silicon Valley Bank.
The US Treasury, Federal Reserve Board, and the Financial Deposit Insurance Corporation announced on Sunday that they would “fully protect” all depositors.
“After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary (Janet) Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors,” the statement said.
After the regulators took control on Friday, there was a lingering question around what would happen to all the deposits.
Under FDIC, only the first $250,000 of the deposit is insured and there was a possibility customers might lose some of the money they had deposited with SVB.
With over 50 per cent of the startups in the US banking with SVB, many worried they wouldn’t be able to make payroll in the coming weeks.
With the announcement, the US regulators have removed that risk and depositors are expecting to be made whole and will have access to their funds starting Monday.
According to Bloomberg, the FDIC started accepting bids to find a buyer for SVB on Saturday. The bids reportedly closed Sunday afternoon but it is immediately clear whether one or multiple buyers will emerge.
HSBC rescues SVB UK
In a surprising end to the frantic weekend, HSBC Holdings became the white knight saviour of Silicon Valley Bank.
On Monday, Europe’s largest bank announced that it had acquired the UK subsidiary of SVB for £1.
“This acquisition makes excellent strategic sense for our business in the UK,” HSBC CEO Noel Quinn said in a statement.
The deal rescues Silicon Valley Bank UK Limited from the insolvency process.
In a statement, the Bank of England further detailed that SVB UK had a balance sheet of approximately £8.8B and a deposit base of approximately £6.7B.
For a large number of UK’s tech startups and fintech players, the news should come as a relief, who were wondering if they would even make the payroll starting Monday.
The rescue deal from HSBC saves the UK’s tech ecosystem from collapse while the BoE maintains that its banking system remains strong.
Support from startups and venture firms
Amidst its collapse, the significance of Silicon Valley Bank is evident from the support it is drawing from startups and venture firms.
Even before the US regulators announced that the depositors will be made whole, more than 100 VCs and investing firms signed a statement supporting SVB.
Bloomberg reports that about 125 venture firms including Sequoia Capital signed on a statement spearheaded by General Catalyst.
This is an *extinction level event* for startups and will set startups and innovation back by 10 years or more.— Garry Tan 陈嘉兴 (@garrytan) March 10, 2023
BIG TECH will not care about this. They have cash elsewhere.
All little startups, tomorrow’s Google’s and Facebooks, will be extinguished if we don’t find a fix.
On Saturday, the startup incubator Y Combinator shared a petition signed by hundreds of founders and chief executives to US Treasury Secretary Janet Yellen and other regulators.
Several VC leaders met today to discuss the aftermath of SVB’s downfall. This is a joint statement from all of us. @Accel @altcap @BCapitalGroup @generalcatalyst @eladgil @GreylockVC @khoslaventures @kleinerperkins @lightspeedvp @MayfieldFund @Redpoint @RibbitCapital @upfrontvc pic.twitter.com/7OtHq0zwT1— Hemant Taneja (@htaneja) March 11, 2023
All these petitions ask for relief and immediate attention to small businesses, startups, and their employees with deposits at SVB.
The tragedy of SVB is that its not the wealthy taking the hit. It’s the thousands of companies who borrowed from SVB and were required to keep their cash in SVB. Those entrepreneurs and their employees and vendors are feeling the pain. And they are who the Fed should protect— Mark Cuban (@mcuban) March 11, 2023
“Silicon Valley Bank has been a trusted and long-time partner to the venture capital industry and our founders,” the statement posted by General Catalyst’s Hemant Taneja reads.
The investors called the collapse of Silicon Valley Bank as an “extinction-level event” for more than half of US tech and life sciences companies that bank with SVB.
US President Joe Biden reassures taxpayers amidst volatility
For the US regulators, the immediate aftermath of Silicon Valley Bank collapse was to avoid a bank run.
While the regulators acted upon and reassured SVB’s customers that their deposits will be made whole and available on Monday, the volatility in US banking stocks remained.
Speaking about the crisis, US President Joe Biden said the taxpayers will not bear any losses from the collapse of SVB.
He emphasised that the announcement to rescue SVB was mainly to help its customers be able to pay their workers and pay their bills.
The American people and American businesses can have confidence that their bank deposits will be there when they need them.— President Biden (@POTUS) March 13, 2023
“Their hard-working employees can breathe easier as well,” Biden said.
Biden added, “No losses will be borne by taxpayers.”
He further said the money will come from the fees that banks pay into America’s deposit insurance fund.
While speaking about the collapse of SVB, Biden was critical of the management and even mentioned that investors “will not be protected.”
In conclusion, Biden argued for stronger rules on banks and demanded the policymakers to enact laws that will avoid further collapse of American banks.
FDIC fails to find a buyer for SVB
The Federal Deposit Insurance Corp. (FDIC) was unable to find a buyer for the failed Silicon Valley Bank over the weekend.
According to The Wall Street Journal, the regulators are planning to take another crack at the auction of SVB.
Over the weekend, the US regulators declared the firm systemic and assured to cover all depositors, including those with deposits above typical insured sum of $250,000.
The FDIC seized Silicon Valley Bank on Friday after its failure to raise fresh capital and shore up its finances.
It is being reported that none of the largest US banks bid on SVB during a failed auction on Sunday.
However, there was one offer made by another institution but the FDIC declined it and the timing for the second auction remains unclear.
Unlike the UK, where HSBC acquired Silicon Valley Bank for a token money of £1, the US regulators might have to sell assets of SVB to different suitors.
The regulators are trying to avoid a run on deposits at other banks and for them, the sale of SVB could not come any sooner.
SVB’s new CEO says business as usual
After assurance from the US regulators that all the depositors will be covered, Silicon Valley Bank is officially back, sort of.
In a surprising email on late Monday evening, the bank’s new CEO Tim Mayopoulos stated that the bank is not only open but it was business as usual.
“Silicon Valley Bank, N.A. is open and conducting business as usual,” the email, obtained by TechCrunch from multiple sources, read.
The FDIC transferred all the deposits and assets of the former SVB to a newly-created, full-service FDIC-operated bridge bank called Silicon Valley Bank, N.A.
Mayopoulos, a former executive at Fannie Mae, oversaw the bank through the 2008 recession and was recently the president of Blend, which offers software to the consumer banking industry.
After the FDIC seized SVB on Friday, its previous chief executive Greg Becker stepped down and the regulators also removed the senior management from the bank.
While Mayopoulos tries to restore confidence in the bank, some founders and depositors are still struggling to access their accounts.
The new CEO particularly mentioned that “all wire payments entered on March 9 or 10 that have not already been processed have since been cancelled. If you wish to consummate those transactions, you need to reinitiate them.”
There still remain a number of unanswered questions about the state of SVB and the looming second auction of its assets.
With the assurance from the new CEO that the bank is working again, there is a possibility that major banks will show interest in acquiring SVB.
Silicon Valley Bank sold to First Citizens
In a big relief to US regulators, the First Citizens Bank has agreed to acquire the commercial banking business of the failed Silicon Valley Bank.
The deal will see First Citizens Bank assume assets of $110 billion, deposits of $56 billion and loans of $72 billion from Silicon Valley Bridge Bank.
On Monday, SVB’s 17 branches will reopen under the First Citizens brand and all depositors will become the depositors of First Citizens.
At the end of 2022, the First Citizens Bank & Trust Company was the 30th largest bank in America. It is now acquiring the 16th largest bank, which failed earlier this month leading to doubts about stability of banks.
The transaction does not include the private banking arm of SVB, which the FDIC is seeking to sell.
While some observers have raised questions about the ability of First Citizens Bank to overtake failed SVB, the bank had also completed the acquisition of CIT Group Inc. last year in a deal valued at more than $2 billion.