The demise of Silicon Valley Bank (NASDAQ:SIVB) has shocked everyone. Last week, SVB announced that it was raising both debt and equity capital to shore up its balance sheet. The bank that provides services to almost half of all venture-backed tech firms gave the all-clear notice, sounded by CEO Greg Becker, who stated:
“Even before today, we had ample liquidity and flexibility to manage our liquidity position, with one of the lowest loan-to-deposit ratios of any bank of our size, income from progressive securities paydowns, levers to manage our off-balance sheet client funds, and substantial borrowing capacity. The improved cash liquidity, profitability and financial flexibility resulting from the actions we announced today will bolster our financial position and our ability to support clients through sustained market pressures. The vast majority of our assets are in high-quality, government and agency securities and low-credit-loss lending activities. We’ve demonstrated strong credit performance throughout cycles, and the risk profile of our loan portfolio has significantly improved over time, with strong expansion of the lowest risk categories. Early-stage loans, our highest risk segment, today makes up only 3% of the portfolio. Our flexible balance sheet and long experience navigating market cycles have enabled us to effectively support our clients over time and establish a longstanding reputation as a trusted partner in both good and challenging times.”
Following a failed attempt to raise capital, SVB shut its doors on Friday as regulators stepped in to take over the bank and set up a new entity. If you hold $250,000 or less in your account, you are fine. If you hold over that amount, well, who knows?
Images of people attempting to get their money out of the bank showed up on financial networks as stories of private firms questioning their ability to make payroll next week peppered cable news.
The collapse of Silicon Valley Bank followed the implosion of Silvergate Bank – a firm that was active in the crypto sector but suffered from the same problem as SVB.
SVB’s issue was parking money in long-duration assets during a time when interest rates were low. As interest rates have risen with great rapidity, as the Fed attempts to defeat inflation, the law of unintended consequences kicked in. The discount on these securities had increased dramatically – selling generated losses. These two banks found themselves underwater as account holders fled as the hole in the balance sheet became apparent.
Several public Fintechs have already reported their exposure to SVB. Private ones are probably still figuring out next steps, but hundreds or thousands of firms are impacted.
I less than 24 hours, Silicon Valley Bank closed down: taken over by the US FDIC.
Things are to get bad for tech: starting w startups/scaleups that did not manage to get their money out.
There will be tech companies struggling to make payroll & pay vendors next week. https://t.co/zQ5U5etGgp
— Gergely Orosz (@GergelyOrosz) March 10, 2023
While many regional banks saw their shares drop last week, First Republic Bank (NYSE:FRC) shares closed dramatically lower due to reports of unrealized losses on their balance sheet.
WSJ.com reported that “unrealized losses on assets at the bank as well as its heavy reliance on deposits that could turn out to be flighty,” while the bank claimed to have “strong capital and liquidity positions.”
Some pundits said SVB’s situation could be an outlier as accounts at the bank were largely over $250,000 insured threshold, and not covered by FDIC. This is not the case with most other banks.
1. Only 2.7% of SVB deposits are less than $250,000.
Meaning, 97.3% aren't FDIC insured. pic.twitter.com/NTWu17MVmW
— Genevieve Roch-Decter, CFA (@GRDecter) March 10, 2023
Mark Cuban commented on Twitter that guaranteeing only $250,000 is far too low. Cuban said he had zero funds at SVB, but several of his portfolio companies did – totaling around $8 to $10 million.
A couple SVB thoughts. 1. 250k is too low. It's insane that a small company with say 2.5m in payables and payroll at the end of the month should be "prudent" and split their cash across 10 banks in case of a run. The fees and admin would be crazy. But great for banks
— Mark Cuban (@mcuban) March 11, 2023
Bill Ackman, CEO of Pershing Square, published a manifesto on Twitter, calling the Federal government’s lack of action beyond taking over the bank a huge mistake. Ackman stated:
Absent @jpmorgan @citi or @BankofAmerica acquiring SVB before the open on Monday, a prospect I believe to be unlikely, or the gov’t guaranteeing all of SVB’s deposits, the giant sucking sound you will hear will be the withdrawal of substantially all uninsured deposits from all but the ‘systemically important banks’ (SIBs). These funds will be transferred to the SIBs, US Treasury (UST) money market funds and short-term UST. There is already pressure to transfer cash to short-term UST and UST money market accounts due to the substantially higher yields available on risk-free UST vs. bank deposits. These withdrawals will drain liquidity from community, regional and other banks and begin the destruction of these important institutions. The increased demand for short-term UST will drive short rates lower complicating the @federalreserve ’s efforts to raise rates to slow the economy.
The gov’t has about 48 hours to fix a-soon-to-be-irreversible mistake. By allowing @SVB_Financial to fail without protecting all depositors, the world has woken up to what an uninsured deposit is — an unsecured illiquid claim on a failed bank. Absent @jpmorgan @citi or… https://t.co/SqdkFK7Fld
— Bill Ackman (@BillAckman) March 11, 2023
He said the consequences of the government’s failure to guarantee SVB deposits, apparently beyond the $250K, are “vast and profound” and need to be addressed before Monday.
What is clear is the rapidity of rate increases enacted by the Federal Reserve has caused the current bank crisis and falls under the law of unintended consequences. Questions remain as to why these banks did not take action sooner. And why did the regulators not meet with bank executives and review the floundering balance sheets?
The collapse of SVB and the collateral damage will not be fully understood for days, and everyone is wondering if there is another shoe to drop.
Related: Silicon Valley Bank UK Insolvent, Tech Founders Appeal to UK Government