In less than two days at the end of last week, Silicon Valley Bank collapsed in the course of a run on the bank by its depositors.
The run on Silicon Valley Bank.
A run on the bank drove Silicon Valley Bank (SVB) into insolvency, a failure that hit the tech sector, and especially its start-ups, hard. Just before noon on Friday the US Federal Deposit Insurance Corporation (FDIC) closed SVB, placed it in receivership, and began working to find buyers for the failed bank. Federal regulators worked over the weekend to control the damage. It is, as the AP puts it, “the largest failure of a U.S. financial institution since the height of the financial crisis almost 15 years ago.”
A run on the bank pushed SVB into receivership on Friday.
Rising interest rates in the US made initial public offerings more difficult, and constrained some of the venture funding starts-up had hoped to obtain. Many of the companies affected were SVB clients, and some began to withdraw funds to make payroll and cover other liquidity needs. This induced other clients, concerned about the safety of their deposits, to withdraw money and move it to what they perceived as safer banks.
In turn, Reuters reports, this incipient run induced SVB to take steps to cover the withdrawals. “To fund the redemptions, Silicon Valley Bank sold on Wednesday a $21 billion bond portfolio consisting mostly of U.S. Treasuries. The portfolio was yielding it an average 1.79%, far below the current 10-year Treasury yield of around 3.9%. This forced SVB to recognize a $1.8 billion loss, which it needed to fill through a capital raise.”
Early Thursday SVB announced its intention to make good the loss through the sale of $2.25 billion in common equity and preferred convertible stock. The run continued, however. The California Department of Financial Protection and Innovation said, according to the Wall Street Journal, that on Thursday alone customers attempted to withdraw $42 billion, roughly 25% of SVB’s total deposits.
By the end of Thursday this effort to raise funds failed, as prospective investors were frightened away by the prospect of more withdrawals. On Friday SVB looked for alternative sources of funding, but the US Federal Deposit Insurance Corporation (FDIC) intervened and placed the bank under receivership. SVB had gone from sound condition to insolvency in about a day, and into receivership less than a day after that.
SVB was the bank for tech-sector startups.
The Wall Street Journal summarizes Silicon Valley Bank’s place in the market. It was particularly important to venture-backed tech startups, including the cyber subsector. “SVB catered mainly to the insular ecosystem of startups and the investors that fund them,” the Journal writes. “Its deposits boomed alongside the tech industry, rising 86% in 2021 to $189 billion and peaking at $198 billion a quarter later. The bank poured large amounts of the deposits into U.S. Treasurys and other government-sponsored debt securities.”
Silicon Valley Bank had invested heavily in long-term US Treasury bonds at a time when the Federal Reserve had established low interest rates. Bloomberg observes that, “SVB took in tens of billions of dollars from its venture capital clients and then, confident that rates would stay steady, plowed that cash into longer-term bonds.”
Most investors missed signs of trouble, but some short-sellers had begun to take an interest in Silicon Valley Bank back in January, Bloomberg reports. “They had bought all these mortgages at the top of the market and were sitting on a massive unrealized loss,” one of the shorts, William C. Martin, told Bloomberg. “And it was sitting there in plain sight. There were a number of other banks and insurance companies with similar issues, but I haven’t seen anyone anywhere near the scale of Silicon Valley Bank.” A combination of fixed-income exposure and dependence on volatile venture-capital-backed depositors rendered the bank especially vulnerable.
Most of the firms affected by the collapse are American, but there are effects being felt internationally as well. For example, Reuters reports that Silicon Valley Bank UK holds about £2.5 billion (roughly $3 billion) in deposits from venture-backed British startups. The Bank of London has submitted an offer for SVB UK. (Added, 5:15 AM ET, March 13th, 2023. CNBC reports that, early Monday morning, "HSBC confirmed that its U.K. ring-fenced subsidiary, HSBC UK Bank, had agreed to acquire SVB U.K. for £1 ($1.21). The assets and liabilities of SVB U.K.’s parent company are excluded from the transaction." The Telegraph reports that the deal was organized by the Bank of England, the Prudential Regulation Authority, the Treasury, and the Financial Conduct Authority. In a statement, the Bank of England said,"The Bank and HM Treasury can confirm that all depositors' money with SVB UK is safe and secure as a result of this transaction. SVB UK's business will continue to be operated normally by SVB UK. All services will continue to operate as normal and customers should not notice any changes.")
Finding a buyer for SVB, and protecting depositors.
The FDIC worked over the weekend to find a buyer for SVB, one that would be able to cover the depositors’ accounts. Final bids were due Sunday. The FDIC hoped to be able to make between 30% and 50% of depositors’ funds available by the time the bank opened Monday.
But the US Department of the Treasury, the FDIC, and the Federal Reserve announced late Sunday that the government had decided to take extraordinary measures to protect depositors:
“Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.
“After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary 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. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”
Note that this is specifically protection of SVB’s depositors. The bank’s investors and bond holders are not receiving similar protection, and the bank's officers are out.