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Timeline: The Shocking Collapse of Silicon Valley Bank

Just a few days ago, Silicon Valley Bank (SVB) was still seen as a well-respected player in the tech space, counting thousands of venture capital-backed US startups as its clients.

But fast forward to the end of last week, SVB was shut down by regulators after a panic-induced bank run.

So how exactly did this happen? Let’s go into more detail below.

Road to a bank run

SVB and its clients generally thrived during the era of low interest rates, but as rates rose, SVB found itself more exposed to risk than a typical bank. However, as of the end of 2022, the bank’s balance sheet presented no cause for alarm.

Furthermore, the bank was viewed positively in several points. Most Wall Street analyst ratings were overwhelmingly positive on the bank’s stock, and Forbes had just added the bank to its Financial All-Stars list.

External signs of trouble emerged on Wednesday, March 8, when the SVB surprised investors with news that the bank needed to raise more than $2 billion to shore up its balance sheet.

The reaction from major venture capitalists has not been positive, with Peter Thiel’s Coatue Management, Union Square Ventures and Founders Fund all moving to limit exposure to the 40-year-old bank. The influence of these firms is believed to have added fuel to the fire and a bank run ensued.

Also influencing the decision-making process was the fact that SVB had the highest proportion of domestic uninsured deposits of all large banks. These amounted to nearly $152 billion, or about 97% of all deposits.

The Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 per account, per bank, for depositors.

By the end of the day, customers had attempted to withdraw $42 billion in deposits.

What triggered the collapse of the SVB?

Although the collapse of SVB occurred within 44 hours, its roots go back to the early years of the pandemic.

In 2021, venture capital-backed US companies raised a record $330 billion, double the amount seen in 2020. At the time, interest rates were at low levels to help prop up the economy .

Matt Levine sums it up nicely: “When interest rates are low everywhere, a dollar in 20 years is worth a dollar today, so a startup whose business model is going to lose money for a decade building artificial intelligence, and then raking in a a lot of money in the distant future sounds pretty good. When interest rates are higher, a dollar today is better than a dollar tomorrow, so investors want cash flow. When interest rates have been low for a long time and suddenly they have become high, all the money that flowed to your customers is suddenly cut off”.

YearUS Venture Capital Assets % Change Year 2021$330B98% 2020$167B15% 2019$145B1% 2018$144B64% 2017$88B6% 2016$83B-3%

Source: Pitchbook

Why is this important? During this time, SVB has received billions of dollars from these venture-backed clients. In just one year, their deposits increased by 100%. They took these funds and invested them in long-term bonds. As a result, this created a dangerous trap as the company expected rates to remain low.

During this period, SVB invested in top-of-the-market bonds. As interest rates rose and bond prices fell, the SVB began to suffer large losses on its long-term bonds.

Losses fuel a liquidity crisis

When SVB released its fourth quarter results in early 2023, Moodys Investor Service, a credit rating agency, took notice. In early March, it said SVB was at high risk of a downgrade due to its significant unrealized losses.

In response, the SVB sought to sell $2 billion of its loss-making investments to help raise liquidity for its struggling balance sheet. Soon, more hedge funds and venture investors realized that SVB might be on thin ice. Depositors withdrew funds in droves, spurring a liquidity crunch and prompting California regulators and the FDIC to step in and shut down the bank.

What happens now?

While much of SVB’s activity has been focused on the technology sector, the shocking collapse of the banks has shaken a financial sector that is already on edge.

The four biggest US banks lost a total of $52 billion the day before the SVB collapsed. Other bank stocks posted double-digit declines on Friday, including Signature Bank (-23%), First Republic (-15%) and Silvergate Capital (-11%).

NameShare Price Change, 10 March 2023Unrealized Losses / Tangible Equity SVB Financial-60%*-99% First Republic Bank-15%-29% Zions Bancorp-2%-47% Comerica-5%-47% US Bancorp- 4%- 55% Fifth Third Bancorp-4%-38% Bank of America-1%-54% Wells Fargo1%-33% JPMorgan-1%-21%

Source: Morningstar Direct. *Represents March 9th data, trading stopped March 10th.

When the dust has settled, it is difficult to predict the knock-on effects that will emerge from this dramatic event. For investors, Treasury Secretary Janet Yellen heralded confidence in the banking system that it remains resilient, noting that regulators have the proper tools to respond to the problem.

But others have seen problems arise as early as 2020 (or earlier), when commercial banking assets were skyrocketing and banks bought bonds when rates were low.

The entire industry is in crisis and the banks and investors who back these assets will have to figure out what to do.-Christopher Whalen, The Institutional Risk Analyst

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