Long reads

Why did SVB collapse?

Paige McNamee

Paige McNamee

Senior Reporter, Finextra

In a spectacle brimming with action more compelling than anything seen at the Oscars, Silicon Valley Bank’s dramatic and total collapse over the weekend continues to unleash plot-twists on the beleaguered tech sector.

The rapid downfall of the bank, a California darling, has dealt a terrifying blow to the industry, and the true fallout for the space remains to be seen. One thing is clear, as the largest bank collapse since 2008, and one of the largest bank failures in history, the story is far from over.

To get a clearer picture of the situation, we’ve drawn up an overview of the saga which came to a head late last week.

What led to the collapse of SVB?

Information has emerged detailing a series of questionable decisions made by SVB’s management over the past 24 months, culminating in last week’s turmoil.

For context, the bank held over $200 billion in assets when it failed, and had banked more than 50% of all US venture-backed tech and life sciences companies at some point in their existence. According to the Federal Reserve, SVB was ranked the 16th largest bank in the US prior to its collapse.

At the peak of the tech boom in 2021, venture capital was all but funnelling cash investments into tech companies, many of which banked with SVB. The bank, while welcoming this surge in deposits – growing from $102 billion to $189 billion, needed a place to park this cash where it would make returns in the face of the low interest rate environment.

At the time, it looked to pump up investment in its $120 billion portfolio of government-backed-securities, and did so by locking $91 billion into fixed rate mortgage bonds with an average interest rate of 1.64%. The bonds left SVB exposed should interest rates rise – which they did, causing the value of the bank’s portfolio to tumble by $15 billion, all but wiping out the bank’s equity.

In February and March this year, SVB’s deposits began dropping more rapidly than the declines felt in the preceding months, leading to a decision by CEO Greg Becker, to liquidate securities which were available for sale, re-allocating the funds into shorter-term assets with higher returns.

This liquidation necessitated a $1.8 billion loss on the value of the securities. SVB’s management, advised by Goldman Sachs, attempted to raise $2.5 billion of new equity from institutional investors on Wednesday to offset this large loss, in a transaction backed by a $500 million share order from General Atlantic. The unexpected substantial loss, coupled with a large non-underwritten capital raise took the market by surprise, frightening investors and customers, making the capital raise impossible to pull-off.

Adding fuel to the fire, well known venture capitalists and firms were encouraging companies to pull their funds from SVB. In response, an internal SVB call heard Becker urge investors and customers to “stay calm” and that the bank has “ample liquidity to support our clients with one exception: If everyone is telling each other SVB is in trouble, that would be a challenge.”

With Twitter almost instantly devolving into a maelstrom of gossip about an impending bank-run, panic, of course, ensued.

SVB was facing a dark reality of losing vital deposits, which could force the bank to sell its bond portfolio at a significant loss, inching ever closer to insolvency.

By Friday morning, customers had initiated $42 billion of withdrawal in one day. The California Department of Financial Protection and Innovation announced it had taken possession of Silicon Valley Bank and appointed the FDIC as receiver, citing "inadequate liquidity and insolvency."

What is the UK government’s plan to help UK tech firms caught up in the SVB bank?

On Friday, SVB UK made great efforts to distance itself from its US counterpart, reassuring clients that it is a standalone, independent and regulated entity, with a separate balance sheet. UK regulators were keen to stem fears of contagion which could spread from SVB’s US collapse to its UK arm.

While SVB UK only held just over 3,000 business accounts, a bank run on SVB’s UK arm would spell serious trouble for the tech industry, as many of the UK customers only held bank accounts with SVB UK.   

By Sunday evening, news had broken that PM Rishi Sunak was in talks with UK financial institutions to strike a deal to purchase the UK bank. On Monday morning at 7am, the Treasury announced SVB UK had been purchased by HSBC UK for £1, in a rescue deal which ensures that all customer deposits would be protected.

Chancellor Jeremy Hunt stated: “Today the government and the Bank of England have facilitated a private sale of Silicon Valley Bank UK; this ensures customer deposits are protected and can bank as normal, with no taxpayer support. I am pleased we have reached a resolution in such short order.

“HSBC is Europe’s largest bank, and SVB UK customers should feel reassured by the strength, safety and security that brings them.”

Were fintech companies impacted by SVB’s failure?

As the bank for tech firms, SVB carried out a significant amount of banking services for fintechs which traditional financial institutions were unable or unwilling to undertake.

Steve McLaughlin, founder and CEO of fintech venture fund, FT Partners, told Bloomberg, that a key question being heard throughout the industry is how far is this going to go?

“I wouldn’t say that the [access to funding] is closing up, I would say that this isn’t helpful. Given that we’re right in the middle of it, its pretty painful for a lot of tech companies across the world. I think that fact that the Fed came out and did what they did was incredibly helpful (and expected to some extent) […] Right now we’re getting hundreds of calls from companies looking for credit funds, structured securities, but you see some of the big guys that wrote all the cheques leading up to the big boom in tech and fintech (like Tiger), really pulling back on their private investments and looking at their portfolio companies.”

So where can the industry turn now for their banking needs, given the traditional banks don’t necessarily offer the services fintechs need?

“A lot of businesses were running their businesses through SVB – not just putting their deposits there.”

He continued that certain fintechs were stepping up to offer their services to tech firms needing banking services in the absence of SVB, but this is just a small number. “The economy in the fintech universe is extremely strong and I think there will be more places for people to go.”

McLaughlin thinks this is actually a great time for “fintech to shine”, as many of the more established neo banks – like Revolut for example, have been able to grow “like a weed” over the past few years, and are potentially better placed to step in and offer services to these fintechs than traditional banks. He reasons that these neo banks are also unlikely to have the risky balance sheet issues which will be troubling larger institutions at the moment.

Which banks are at risk after the SVB collapse?

New York state regulators were quick to step in and shutter Signature Bank, a large crypto lender, as customers began pulling deposits in droves, panicked by the rapid downfall of SVB and concerned about exposure to the fallout.

In a statement on Sunday, the FDIC, US Treasury and the Federal Reserve said that Signature Bank presented a systemic risk would could threaten the US banking system. “We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority […]All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.”

Beyond Signature Bank, contributing editor for Finextra, Scott Hamilton, writes that three US regional banks have also experienced major ‘market hangovers’ from the weekend’s events.

PacWest Bancorp’s stock price lost over 50% of its value on Friday. By the NASDAQ market open on Monday morning, its price hovered at $6/share, down from its $29/share price on February 7th. This amounted to a dramatic loss – almost 75% of its value.

First Republic Bank’s market value plummeted on by 62% on Monday, with Moody’s saying its share of deposits that exceed the Federal insurance threshold rendering its funding profile more sensitive to rapid, large withdrawals. Additionally, if it were to face higher-than-anticipated deposit outflows and liquidity backstops proved insufficient, the bank could need to sell assets, thus crystalizing unrealised losses.”

Western Alliance Bancorporation also suffered a 47.1% drop on Monday, which prompted Moody’s to cite similar concerns when placing Western Alliance on review. The ratings agency stated that to counter the bank’s funding vulnerability, Western Alliance announced on 13 March 2023 that it had boosted its cash reserves to $25 billion+, an increase in its liquidity pool that will be assessed during the review process. “Still, if it were to face higher-than-anticipated deposit outflows, Western Alliance could need to sell assets, thus crystalising unrealized losses.”

Other lenders placed on review by Moody’s include Intrust Financial Corp., UMB Financial Corp., Zions Bancorp. and Comerica Inc. Concerns over the lenders’ reliance on uninsured deposit funding and unrealised losses in their asset portfolios were reasons cited in each of these instances.

Asian banking stocks also began to feel the pinch on Tuesday, with share of MUFG, Mizuho and SMFG falling between 7.5% and 8.1%. The FT reasons that the reaction in the Japanese market is a result of the US banking sector’s sell-off and uncertainty over interest rates following SVB’s collapse.

On Tuesday morning, Moody’s also released an update covering implications of the SVB collapse on European banks, stating that the failures of Silicon Valley Bank (SVB) and Signature Bank and receivership of Silvergate Bank (Silvergate) disrupted financial markets in the US and beyond. “US authorities' announcement that all depositors of Silicon Valley Bank and Signature Bank will be made whole will buffer the impact of the banks' failures on depositor and investor confidence in the US, and we expect the direct impact on banks beyond the US to be small, though root causes and second order effects bear close watching.”

“Monetary tightening likely still has some way to run, and developing stresses in the US banking system will also weaken investor confidence and heighten funding tensions for European institutions that, as with any bank, by construction combine maturity mismatches with leverage. These effects are magnified when rates increase faster than expected, which causes some fixed-rate assets to fall in value and liabilities to start repricing upward more quickly than assets roll off and are replaced.”

What does it mean when a bank is seized by regulators?

Typically, as the FDIC is the insurer of the bank’s deposits, it will pay out insurance up to the $250,000 insurance limits. This is generally done within a few days of the banks closure, and the FDIC’s press release on SVB announced all insured depositors would have full access to their insured deposits no later than Monday morning (March 13 2023).

It furthered that it would pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.

The FDIC would traditionally pay these insured deposits into a new account at another insured bank, in an amount equal to their deposit at the failed bank, or by issuing a cheque to that amount.

SVB’s 17 branches and online banking services across California and Massachusetts re-opened on Monday for normal business hours, this time under the supervision of the Deposit Insurance National Bank (DINB) of Santa Clara. The FDIC statement adds that Silicon Valley Bank’s official checks will continue to clear, and under the Federal Deposit Insurance Act, the FDIC may create a DINB to ensure that customers have continued access to their insured funds.

Could the Silicon Valley Bank collapse spark the next financial crash?

It appears that given the proactive and highly involved behaviour of regulators in both the US and UK, regulators are working to stem the potential fallout of SVB’s collapse as a matter of utmost urgency. As soon as SVB concerns began emerging, particularly given the uncertain broader economic environment, markets and regulators were quick to identify flags which invoked memories of the 2008 GFC.

Usually, the government would not get involved with banks that are not systemically important financial institutions (SIFI), while SVB and Signature Bank manage $310 billion in assets, they were not considered SIFI banks.

Concerned about contagion across smaller banks in the US, the Fed deployed an emergency Bank Term Funding Program to protect at-risk banks. Janet Yellen accessed the $100 billion Deposit Insurance Fund to make the depositors of SVB and Signature Bank whole. This distinguishes the current rescue package from that of the 2008 bailout response.

The response by regulators has received a mixed reaction by those in the industry.

Ken Griffin, founder and CEO of the world’s largest hedge fund, Citadel, has loudly expressed his dissatisfaction with the regulators’ response to the collapse. In an interview with the FT, Griffin stated that the government should not have stepped in to protect all SVB depositors, and that the rescue package is “breaking down before our eyes.” The position holds that the government’s decision to make all depositors whole, going beyond the federal insurance limit of $250,000 is anathema to functioning of a free market.

“There’s been a loss of financial discipline with the government bailing out depositors in full […] It would have been a great lesson in moral hazard. Losses to depositors would have been immaterial, and it would have driven home the point that risk management is essential.”

Conversely, another hedge fund manager, Bill Ackman, has been consistently calling via Twitter for the US government to guarantee deposits.

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