What really happened to Silicon Valley Bank

Yesterday morning, we had a hunch that the market was concerned about Silicon Valley Bank when its stock started dipping right after market open in reaction to the financial institution announcing late on Wednesday a share sale, an asset sale, and an increase in its term borrowing. This column, after summarizing SVB’s financial moves and the resulting market response, opined that those items were not ‘the super juicy bit’ of the news, instead focusing on the bank’s note that startup burn rates were still incredibly high compared to historical norms.

Table of Contents

What Happened?

Whoops. It was not clear until a few hours later that fears over the bank’s health would lead to customers withdrawing their deposits in the bank at such a scale that venture Twitter could only talk about the possibility of SVB facing a bank run.

The COVID-19 Venture Boom

The COVID-19 pandemic had a profound impact on the venture capital market. With global interest rates low to negative, there were quite a few places to put capital to work. This led to larger venture funds, which invested a lot of their money into startups. In turn, these startups deposited that money into SVB, as it was until recently the premier destination for startups’ banking needs.

The Rise in Deposits

However, as the FT notes, the massive rise in deposits at SVB – never a bad thing at a bank – eclipsed the bank’s ability to loan capital. This meant it had a lot of money lying around.

SVB’s Investment Strategy

The bank invested all that money at low rates into things like U.S. Treasuries (page 6 of its mid-March update presentation). Later, the Fed raised rates, venture capital investment slowed, and the value of low-yield assets fell as the cost of money rose.

The Squeeze on Net Interest Margin

Banking customers like competitive yields on deposits, so SVB was holding low-yielding assets and paying out more interest on deposits. This led to a squeeze on its net interest margin (NIM).

SVB’s Response

The bank decided to sell its available-for-sale (AFS) portfolio at a loss (rates up, value down) so that it could reinvest that capital into higher-yielding assets.

SVB’s Expectations

SVB wrote to investors that it was ‘taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their businesses.’ What did SVB expect after all was said and done? An estimated $450 million boost to its net interest income.

The Market’s Response

However, the market didn’t quite believe SVB’s projections. The bank’s stock price plummeted, and the rumor mill started churning out stories about a potential bank run.

Is a Bank Run Imminent?

While it’s hard to say for sure, one thing is certain: SVB has a problem on its hands. With deposits fleeing and the market losing confidence in the bank’s ability to manage risk, it’s possible that we could see a repeat of 2008.

Conclusion

The SVB crash serves as a cautionary tale about the risks associated with venture capital and banking. While larger funds may have invested heavily in startups, it’s not clear whether these investments will pay off in the long run. Meanwhile, banks like SVB are struggling to manage risk in a rapidly changing market.

What’s Next?

Only time will tell if SVB can recover from this crisis. But one thing is certain: the venture capital and banking industries will be watching closely as the situation unfolds.