Silicon Valley Bank in 1,000 Words
Everything in one place + my first and second derivative thoughts...
Hi All,
Well, as you’ve undoubtedly seen, sadly, Silicon Valley Bank, ‘SVB’, has failed. While it’s mega news as its the first bank of size to fail since the GFC - it was valued at $44bn less than 18 months ago! - this is particularly interesting to me because:
We get to see the power of finance and government in full theatre. A period of time that we’ll look back on as industry-defining. After all, I missed the GFC
SVB was the epicentre of venture-backed companies. VCs deposited there. VC-backed companies deposited there. If you were tech-focused and had money, you likely used SVB
Rather than being an issue of risky credit (Lehman Brothers) or financial foul play (FTX), SVB’s collapse was an issue of being too liabilities-sensitive in an asset-sensitive world
I called it a few weeks ago…
In this blog post, I first tell you everything that happened, where we are today, and then discuss first-derivative and second-derivative impacts.
Here’s what’s happened in 1,000 words…
Before diving in, let’s have a moment to consider the people impacted by this collapse. It’s always truly terrible and while these things are a spectacle in some ways, the human toll is real. Samaritans Helpline.
If you like my work, please reach out - @711_Joseph 👋🏾
Situation as of 2 weeks ago:
SVB offer corporate banking/finance services to start-ups, venture-funded companies and banking for entrepreneurs. It also has private banking, wealth management, and investment banking business
With the VC funding boom of ‘20 – ‘21, this allowed SVB to increase their deposits from $61.8bn to $176.8bn from FY19 to Q3’22 (53% are non-interest bearing deposits)
However as VC funding is now drying up, inflation-related cost strains continue for its customers and as the FED increases interest rates, SVB will see deposits dry up
This issue is exacerbated as SVB over the same time period, saw their Held-to-Maturity (HTM) Securities balloon from $13.8bn to $93.3bn. Critically, these are 10-year securities with a yield of ~1.6%(!). Worth noting that they did this as with VC throwing money at them, their customers didn’t need loans
If these securities were marked to market, this would cause significant losses of at least 50% of SVB’s tangible equity of ~$15bn
Situation as of 8th March:
Trying to solve the issue, SVB announces the completion of a fire sale of $21bn of assets. This however was the sale of its Available-For-Sale Securities (AFS), rather than the HTM securities I mentioned earlier. This sale incurred a $1.8bn loss!
SVB then planned to sell $2.25bn in shares to raise capital that would limit/reduce the impact of this loss.
$2.25bn consists of $1.25bn common stock, $500m converts and $500m from General Atlantic
In my personal opinion, the timing of this announcement was what killed the bank. Silvergate, an allegedly shady crypto-focused bank announced that it was to close and assets are being liquidated
This announcement massively spooked depositors. Combining this with leading venture capitalists advising their portfolio companies to withdraw deposits, SVB likely saw significant deposit outflows
All of the above spooked the market, sending banking stocks crashing down. Other banks with similarly high AFS and HTM securities saw the biggest pain
SVB itself was, to use a technical term, super rekt…
Following $40bn+ in withdrawals and being almost $1bn underwater, at midday 10th March 2023, the FDIC announced that SVB was no more and had been closed, being in “receivership” by the Federal Deposit Insurance Corporation (FDIC) (Source).
This makes it the 2nd largest bank failure in US history.
There you have it folks! The above is what devastated what otherwise seemingly good bank. In all, I don’t blame management, they took the view of locking in long-term interest rates that seemed high. Hunting for yield is always tough.
In the next section, I think about whether the bank could have been bought then first-order and second-order derivative effects.
NOT ADVICE. PERSONAL OPINION. NOT THE OPINION OF MY EMPLOYER
At best entertainment, at worst a conversation starter…
Post 8th March | Destined to Fail?
In some ways, following the early innings of a bank run (depositors flee), SVB tried to raise further capital. Once this failed, rumours of a sale went rampant.
Let’s run through some logical numbers then you can decide if this was possible.
SVB announced the sale of $21bn in assets. These were 3.6-year duration and had an average yield of 1.79% yield. This resulted in $1.8bn in losses
Crucially, this was only their available-for-sale securities (AFS) portfolio
SVB still had as of FY22, Held-To-Maturity (HTM) assets of $93bn, 10-year+ life with an average yield of 1.61%. 10-year T-Bills are currently yielding 3.725% (!)
Using a broad brush, the $93bn book is 4.4x larger than the AFS book hence loss per $1 security may be higher
Upon any sale of SVB, I imagine that this $93bn stack would have to become marked to market, and could leave them with $5bn+ in losses (*opinion*)
Their market cap is currently <$6bn with trading halted
FDIC covers up to $250k; however considering SVB mostly serves businesses, FED involvement could be a tall order (not on G-SIB list either)
With such massive losses, it was unlikely for a buyer. I do hope one can be found over the next weekend or ….
Looking into the future, let’s think about what can come out of this
First Derivative Impacts
Simply banking peers, and banks as a whole have seen their share prices rocked. From the FT:
”Trading in PacWest, Western Alliance and First Republic were stopped because of the volatility after they all initially fell 40 to 50 per cent. Trading was also briefly stopped in Signature Bank after its shares fell nearly 30 per cent.”
FDIC will likely look to find a larger bank with a stable balance sheet to buy SVB. Interestingly, had such a bank tried to buy SVB at a bill of health, regulators would have likely stepped in
When Washington Mutual failed, it was sold to JPMorgan Chase
At the end of 2022, SVB estimated that almost 96 per cent of its $173.1bn in deposits exceeded or were not covered by FDIC insurance. With VC-backed companies being most of their client base, there is uncertainty that these companies are still “going concern”
Loans will be called maturely, and companies that relied on those credit lines will be hit hard
Second Derivative Impacts
Potential acquisitions of SaaS M&A targets are now unlikely as a large financier is out of the picture
Players like JPM, Brex and Mercury bank would see significant deposit inflows. For the latter two names, they could raise significant capital and become long-term financial players due to this shot to the arm
VC companies may miss payroll and could we see mass furlough/layoffs soon
Companies that had no business relationship with SVB are impacted. For instance, if SVB financed any counterparty functions (including payroll), this may make its own services harder/impossible to execute
VCs may simply also have their funds deposited on SVB. Would they also be trapped in the process? I imagine these funds are called from investors when needed but one to watch
Many of these businesses that would have been key drivers to GDP across the U.S.A won’t have the chance to reach their potential, to the detriment of 1,000s of jobs or 100,00s of jobs. It’s just awful
To Close
Before I close, two parting thoughts:
Some complain about VCs telling their portfolio companies to withdraw deposits. What else are they to do?! Sure, it does exacerbate the situation but at what cost…
It’s just a crummy situation everything considered. This is why I don’t subscribe to no government intervention and I pay my taxes gladly. Hard-working people, due to no fault of their own or taking undue risk may lose their deposits. It’s a shame but the government should step in.
Thank you for reading. Please do subscribe and reach out if you have questions - @711_Joseph 👋🏾
God bless
Joseph - March 11th 2023
Found the technical term "super rekt" very insightful