Collapse of SVB: All 7 things you need to know about Silicon Valley Bank
The Saga of Silicon Valley Bank (SVB)
Are you associated with the tech startup ecosystem, or banking, finance and stock markets, or do you simply keep your money in the bank? In either case, there are several aspects of the collapse of the Silicon Valley Bank that you need to be aware of. There is so much misinformation, speculation and rumors about SVB, so here is my take based on verifiable facts. We will be covering everything you need to know, starting from what was Silicon Valley Bank, to why it failed. We will also include the learning from the collapse of SVB, which is the second biggest banking failure in history. This raises a lot of questions, that I have also answered in a two part video series on the collapse of SVB, and you can find these videos embedded within this article.
All you need to know about the collapse of SVB
So, without further ado, here is all that you might want to know in the aftermath of the collapse of SVB on 10th March, 2023.
#1 – What is SVB?
Silicon Valley Bank is (or rather, was) the 16th largest bank in the United States of America, which makes it a fairly large bank even though it was not technically classified as a large bank in US. Their asset base at the peak was well over USD 200 billion, so that’s certainly not a small amount.
The name of this Bank also highlights its importance in the Silicon Valley, or the tech startup ecosystem of US, and many parts of the world. As per the website of Silicon Valley Bank itself, it counted about half of the entire industry (startups backed by venture capital) as its customers. In addition to these startup companies, they also had the Venture Capital funds opening their accounts with them. Even the LPs (Limited Partners), who invest into the Venture Capital funds, were banking with SVB.
In a nutshell, a significant portion of the startup ecosystem was banking with Silicon Valley Bank. SVB has had a pivotal role in shaping the tech startup ecosystem over the last 40 years, ever since its inception in 1983. It is very well know within the startup ecosystem, even though the world at large has come to know about it, only upon it’s collapse.
#2 – Who should care, and why?
So, does this mean that the collapse of SVB is relevant only for the stakeholders dealing with the startup ecosystem? In fact, that will be far from the truth. So, let us examine who should care about the collapse of SVB, and why.
The first and most obvious stakeholders are those who have anything to do with the startup ecosystem, anywhere in the world, and in any capacity. You need to be aware of the developments, because there are likely to be ripple effects as a consequence of this massive collapse.
Secondly, if you’re connected in any way to the world of business, economics or finance, you need to take a serious note. Even if you are not in the tech sector, or even if you are in any other country, this event is important enough for you to keep your eyes on it. Imagine someone connected to finance and banking not knowing about the 2008 financial crisis, and you will immediately understand where I am going with this!
Thirdly, if you’re not connected even remotely to the business world, or not interested in economics, you still need to be concerned. This is because you have deposited your money in a bank account, even if it is merely a savings account or fixed deposit with any bank anywhere in the world.
This makes it important for everybody in the world to be concerned about what happened to Silicon Valley Bank, because there may be some learnings from your perspective.
#3 – What happened to SVB?
Let us understand what happened to Silicon Valley Bank in very simple terms, without getting into any of the technicalities. SVB has become bankrupt and it’s operations have been stopped by the regulators.
The FDIC (Federal Deposit Insurance Corporation) has taken over control of the bank. Trading in the shares of it’s parent company, SVB Financial Group (NASDAQ: SIVB) has also been stopped.
There have been a few run-up events, so let’s look at three things that happened in the recent past, without going too far back in time.
Firstly, SVB made an announcement on 8th March 2023, that they had to liquidate around $21 billion worth of securities to meet their liquidity requirements, and suffered a loss of $1.8 billion on this sale.
Subsequently, two things happened. Firstly, the customers of the bank started taking their money out of the bank. Secondly, there was a run on the stock, that tumbled by over 60% the next day, on 9th March 2023.
The third big milestone was the taking over of the control of the Bank by the regulators, and handing over the charge of SVB to the FDIC on 10th March 2023.
In a subsequent development, the parent company, SVB Financial Group, also filed for bankruptcy on 17th March 2023.
#4 – Why did SVB fail?
Now that we know what happened to the bank, let us trace the historical events to understand why SVB failed. SVB was synonymous with the startup ecosystem, which was itself going through a tough time, that has been widely termed as the “funding winter”. Many startups have failed to secure funding, and have either downsized, or shut down their operations in the recent past, as a result of the funding winter. However, the collapse of SVB was not directly linked to the collapse of it’s customers.
The collapse was primarily triggered because of a run on the bank by the depositors, who made a beeline to withdraw their funds from the bank. This withdrawal happened because of the announcement of sale of securities at a loss on 8th March, that I mentioned in the previous section. So, why did SVB sell securities at a loss?
They had to sell securities at a loss, because they had a timing mismatch between assets and liabilities. The depositors (bank’s liabilities) had been withdrawing funds, driven by two major factors. Firstly, the interest rates had risen significantly, and the depositors were finding better opportunities to invest or deposit the money elsewhere. Secondly, the funding winter meant that the bank’s customers within the startup ecosystem needed more funds, that they started withdrawing from the bank.
Most importantly, the steep increase in interest rates acted as a double whammy. On the one hand, it led to the flight of capital, as described above. On the other hand, it led to a sharp decline in the prices of the bonds and securities that SVB was holding. Consequently, they suffered these losses of $1.8bn on sale of securities, and had a much bigger hole in their Balance Sheet, on account of the unrealized losses on the portfolio of securities that they were holding.
These were the primary macro-economic reasons that led to the collapse of SVB. Of course, this also gives rise to several other questions. What was the management of the Bank doing? Why did the risk management team not detect and address this issue pro-actively? Did SVB not hedge their interest rate risk? Why did regulators step in only after the damage was done?
As the answers to each of these questions unfolds, we will uncover additional reasons behind the failure of SVB, but the reasons already mentioned above, sufficiently explain the bigger picture.
#5 – What was the turn of events leading to collapse of SVB?
Now that we know what happened, and why SVB failed, let us look at the broader trends and key events that led to this collapse of SVB. We have have already discussed the three events in the week ending 10th March 2023. Let us now look at the bigger picture. The key variables that we need to understand are:
Interest Rates
Firstly, let us look at interest rate trends. The Federal Reserve (Fed) interest rate remained below 0.10% during the pandemic, between April 2020 and February 2022. The Fed started increasing the interest rate from March 2022 onwards, and in just one year, they increased the interest rate from near zero to over 4.5%.
Inflation
Secondly, let us look at inflation. The US has also been printing money in order to boost the economy in the aftermath of the pandemic. Low interest rates combined with more money in the system, led to higher inflation. Consequently, the Fed had to increase the interest rates to combat the spiraling inflation, which had increased to over 9% in June 2022, and continued to remain uncomfortably high at 6% in February 2023.
You can also correlate these timelines with the developments in Ukraine, and you will see how all the factors are inter-related.
Financial condition of the Startup ecosystem
Post the pandemic, a lot of capital was being infused in this ecosystem, and they were flushed with funds. This was also reflected in a very steep growth in the business of SVB. Their deposits swelled during this period, and they invested the money in long term securities. Once the funding winter set in, (and the interest rates started increasing), the depositors steadily started withdrawing their money from the Bank.
Bond Prices
The last piece of this jigsaw puzzle is the impact of the above stated three factors on the assets of the bank. SVB had invested in these long term securities when the interest rates were much lower. Bond prices have an inverse relationship with interest rates. So, as the interest rates increased steeply during this period, the bond prices also witnessed a dramatic fall. If they could hold the bonds until the interest rates fell down again, they could have survived. Needless to mention, SVB, being a bank, should have pinned their future on more substantive risk management, and asset-liability matching practices.
#6 – What is happening next?
The collapse of SVB on 10th March 2023 lead to a lot of nervousness among the stakeholders. The US President and the Fed were quick to respond to the above situation, and allayed the apprehensions of the bank’s depositors. Deposits of only upto $250k are insured by the FDIC, and this lead to sleepless nights for the customers holding large bank balances. Most of the money lying in deposits in SVB, was uninsured, since it was beyond the threshold of $250k! Thankfully, the US authorities announced a program called BTFP – Bank Term Funding Program – and also indicated that all depositors will be protected, including those holding beyond the threshold of insurance. Here is the official press release of the Fed.
However, the investors and shareholders are likely to lose their entire capital. The UK arm has already been sold to HSBC for a symbolic amount of £1 (1 GBP), effectively wiping out the entire capital of their shareholders.
The other stakeholders are the management and the employees of SVB. While I have explained the turn of events at a high level, the regulatory and the investigative authorities will surely be probing deeper into this episode. They are also likely to turn their attention to the fact that the CEO, CFO and CMO of SVB had sold a substantial portion of their holdings in SVB in 2023 itself, just a few days before the collapse.
Stability of smaller banks
The big question is about the stability of smaller banks. At the centre of this debate is a decision taken few years ago to relax the regulatory controls over banks with assets of less than $250 billion. What will be the state of other banks, and will they be protected, and at whose cost?
A recent statement by Janet Yellen, US Secretary of Treasury, indicates that they will step in only to save banks, where there is a systemic risk to the entire sector. If you read between the lines, this could result in flight of capital and deposits from small regional banks to the larger banks. As nervousness and panic grips the market, much more is happening across the world at the time of writing this article, including Credit Suisse getting even deeper into trouble.
What is the learning from collapse of Silicon Valley Bank?
#7 – Learning for you and me
Everyone should care about what happened to Silicon Valley Bank, and about the learning that we can obtain from this episode. There are many shades of the lessons that can be drawn from the perspective of various stakeholders. Here is a short list of the learning
Realigning the focus
Startup founders and the entire ecosystem could learn to focus more on the building robust, profitable and scalable business models, instead of bleeding cash guzzlers, that will fall like a pack of cards if the next funding round is not available. I have explained the key aspects that one needs to take into account in this video on 23 Startup jargons, and keep emphasizing this to entrepreneurs that I meet in my capacity as business and startup advisor.
Diversification
Depositors should at least be aware of the insurance limits on their deposits, and not keep all their eggs in one basket. Similarly, diversification is also important while building any business. The concentration of SVB in the startup ecosystem amplified their risks, and the same is true of any business that does not have a diversified customer base.
Governance
There are several takeaways from a management standpoint too. Governance and control mechanisms need to be deployed in practice, and not just in documents that are prepared to obtain certifications and awards.
Incidentally, SVB had consistently received numerous awards and recognitions from prestigious platforms, such as Forbes. SVB was on the Forbes’ list of America’s Best Banks for the 5th straight year and also included in the inaugural Financial All-Stars list just a few days before going belly up! This only reinforces my strongly held belief that we should take these awards and accolades with more than just a pinch of salt.
Learning TERMs
I have encapsulated other learning elements in an acronym ‘TERMs’ that stands for the following:
T – Thinking
E – Everyone
RM – Risk Management
Thinking
The collapse of SVB has once again demonstrated our inability to think consciously and deeply about things that should matter to us.
If you read the masterpiece on behavioral economics, Thinking, Fast and Slow, you will realize that many of us are often in the automatic or the fast thinking mode. We need to slow down our thinking, so that we are able to consciously process information and take right decisions.
Everyone
The SVB collapse reiterates our natural tendency to follow and ape what everyone else is doing. Following our own path requires us to do our independent thinking.
Risk Management
If we get the above right, we can tread into the third aspect of RM – Risk Management. As I have also mentioned in my DIRECTED framework of time management, managing strategic and disruptive risks needs to be accorded top priority in our pecking order. If you are deeply concerned about such risks, then Nassim Taleb’s book, Black Swan, can provide you with many more insights.
I hope this article has given you a good perspective on what led to the collapse of SVB, and what you can learn from it.
About The Author
Rajiv Maheshwari is a business and start-up advisor, and the co-founder of From The Experts Mouth. He is a management professional with over 25 years of experience, and worked as CEO for a decade, and in leadership roles with NYSE listed companies such as Accenture and WNS.
He is a Chartered Accountant and MBA (Director’s Merit List from IIM Bangalore) and an autodidact, who is on the path of self-directed life long learning and sharing. He is a thought leader, author and keynote speaker and has developed several frameworks to bridge the gap between academia and industry.
Responses