The Perfect Storm: Understanding the Circumstances Behind Silicon Valley Bank’s Collapse
What is going on with Silicon Valley Bank? I don’t know about you all, but I cannot stop watching this. Between this bank collapse and the Vanderpump Rules drama, for the last two weeks I have been constantly refreshing my phone for more info. #teamariana, obviously. Anyway, in case you haven’t been following as closely as I have, I thought I’d write a quick synopsis - about the bank, not about Vanderpump Rules. Although I’m happy to get into that too if you want to call to discuss. 😂
Let’s start with who Silicon Valley Bank is. They were the 16th largest bank in the U.S. Over the past 40 some years, they had become the go-to bank for tech start-up companies. Since many of these tech companies are so young with little banking history, it’s typically hard for them to get funding and debt financing for their ventures. That’s where Silicon Valley Bank steps in. They would provide these venture companies with the funding they needed in order to get going.
This spiral downhill started on March 8th, when SVB announced it was going to sell stock to raise cash. Why did they need to raise cash? Great question. Back in 2020 and 2021, venture capitalists were heavily investing in these start-up companies. They were throwing money at them. The start-ups, in turn, flooded SVB with deposits. You may not know this, but banks have to make a certain amount of money on their customers’ deposits in order to make profit margins for their investors (think bank shareholders). Banks often do this by lending these deposits out and charging interest. For example, let’s say I have $10,000 in my bank account, the bank will lend that $10k to John Doe for an auto loan and charge him 7% interest. That’s how they make money.
Because SVB dealt mostly with tech companies, they received massive amounts of deposits, but not many customers needed loans. They were unable to lend the money out as fast as the deposits came in. So, in order to make this net interest margin, they bought tens of billions of 10-year treasury bonds. Under normal circumstances, this would be considered a pretty conservative investment. The problem is that, when you do this, you can create a duration problem for yourself and that’s exactly what they did. Basically, when they bought into these bonds, they became stuck in these investments for 10 years. I will talk more about this in a bit.
Starting last year, venture capital funding dried up. Without new money pouring in from venture capitalists, these tech companies started drawing down their bank accounts much faster than SVB anticipated. Even though SVB had a solid balance sheet, they could not keep up with the withdrawals. Because the deposits were being held in 10-year bonds, when depositors went to withdrawal their money, the money wasn’t there. At the same time, interest rates were rising quickly. What happens when interest rates rise? The price of bonds goes down. This became a huge problem because the bonds became worth much less that what SVB paid for them. SVB ended up having to sell some of the treasuries to meet these withdrawals and they sold them at a loss of $1.8 billion. That’s when they announced they were going to sell stock to raise the money back from the loss.
This triggered a few prominent venture investors to log into Twitter and start tweeting their concerns that SVB was selling stock, they feared the bank was out of money, and they were taking their money out of SVB. Because most of SVB’s customer base is in tech and they all know each other and follow each other on Twitter, panic spread quickly. Welcome to the first Twitter induced bank run! On Friday, March 10th, SVB customers attempted to withdrawal 42 billion dollars. This is what caused the bank to crash.
Unfortunately, it was a perfect storm of circumstances that took SVB down. Had SVB not had such a condensed client base, had tech start-ups not had so much growth during COVID, had SVB not put their money in long duration bonds, had interest rates not risen so quickly, had venture capitalist money not dried up so quickly last year, and had fear not spread so quickly, this all might have been avoided. I hope this helped explain the circumstances behind the collapse of Silicon Valley Bank and hopefully helped quell any fears that this may happen to your bank. The trick is not to panic.
If you have any questions about this article, or would like to schedule some time to discuss your personal financial situation, please feel free to reach out – Jennifer.jenkins@bluestonewp.com. Thank you!
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.
Rameswaram, S. & King, N. (Hosts). (2023, March 13). Silicon Valley Bank goes bust [Audio podcast episode]. In Today, Explained. Vox. https://www.vox.com/today-explained-podcast
