The Collapse of Silicon Valley Bank

Introduction

Silicon Valley Bank, or SVB, is a regional bank founded in 1983 that primarily serves the Bay Area and caters to tech startups. Founded in Santa Clara, California, the bank has been a trustworthy financial institution for 39 years, with locations across the country and the world. In 2015, SVB served 65% of all US startups and had become the country’s 16th largest bank. From a casual perspective, the bank seemed to be in good health; however, on March 10th, 2023, SVB collapsed in the second-largest bank failure ever in America. The California Department of Financial Protection and Innovation seized the bank after depositors withdrew $42 billion in the span of a single day. SVB’s stock crashed more than 60% as it announced the sale of $1.75 billion in assets in a final bid to free up its balance sheets. So, what happened? 

2-year chart of SVB’s stock

Why SVB Crashed

Despite claiming to encourage innovation through its investments, SVB had an unusually large amount of investments in U.S. Treasury bonds—55% of their portfolio—and mortgage bonds. Bonds are a relatively safe investment that promise low but steady returns in interest. For years, investing in bonds had been successful for SVB, and during the pandemic, tech companies flourished, causing a significant augmentation of deposits. In 2021, it had $189.2 billion in storage, so it bought large amounts of short and long term bonds in a portfolio shift.  

As aforementioned, government bonds are usually a very safe investment, but the circumstances of the post-pandemic economy in conjunction with the makeup of SVB’s customers made this a somewhat risky decision. SVB also failed to set any provisions, appearing to lack any hedges; this meant that their portfolio was vulnerable to the raising of bond interest rates. As interest rates rose, SVB’s holdings appeared less attractive, as new government bonds appeared more attractive and brought greater returns. This meant that their bonds were worth a lot less if they had to sell them. However, at the same time that interest rates rose, start-up funding decreased, which caused an increase in withdrawals as startups needed money to fund their businesses. In order to meet the rampant withdrawal requests, SVB was forced to sell its investments at a loss, losing almost $2 billion. Other stressors, including depositors with risky investments in crypto and the fact that SVB was operating without a Chief Financial Risk Officer, caused increased turmoil in this situation. A bank of SVB’s size is required to have a CRO; SVB knew about the risks and let them slide. 

When news broke about the state of SVB’s balance sheet, customers panicked, which led to the March 10 selloff. Investors sold stocks of banks with similar investment portfolios to SVB amid the chaos; larger banks, like JPMorgan and Wells Fargo, were virtually unaffected. This is because regulators encourage large banks to diversify their investments into different industries and to stray away from riskier assets. Furthermore, large banks are more likely to be bailed out by the government as they are “too big to fail.” This can be seen in the 2008 recession, where many large companies of importance, such as General Motors, were bailed out by the government. 

Conclusion

The crash of SVB is something that should not be overlooked and could cause a ripple effect throughout the industry and contribute to the recession. Stay tuned for the second part of this series where we’ll discuss the fallout of this financial institution.