One of Silicon Valley's main banks has collapsed. How did it happen, and what could be the consequences?
Silicon Valley Bank (SVB) is a financial institution over forty years old. It has been one of the backbones of startup funding in Silicon Valley, having funded or been part of funding more than 30,000 startups in Silicon Valley. At its peak, in 2016, it was the biggest bank in Silicon Valley-based on deposits, with a 25.9% market share.
Before its collapse, SVB had total assets of around $211 billion. In addition, the bank has stated that nearly half of the venture-backed startups in the US have worked with SVB, with estimates ranging from 44% to 48% of US startups tied to SVB.
On March 9, 2023, SVB shares plunged more than 60% in value. The reason for this plunge happened the day before, March 8, when the company announced, via a filing, that it had sold $21 billion in assets. Plus, SVB also planned to sell stock.
After these announcements, panic set in, and people began selling off their SVB shares, with the value having another 66% drop in pre-market trading on March 10, 2023. It got so bad that trading was halted until further notice.
That same day, March 10, 2023, the California Department of Financial Protection and Innovation (DFPI) shut down the bank. Immediately afterward, this same state regulator appointed the Federal Deposit Insurance Corporation (FDIC) as a receiver of all the assets. In turn, the FDIC created a new institution, the Deposit Insurance National Bank of Santa Clara, to hold all SVB assets until further notice.
It’s general practice that banks keep a fraction of the money deposited in them on hand. In fact, most banks invest most of the money in a portfolio with the hopes of having a return, which, in turn, can return to the account owner.
So, this means that even though the money belongs to individuals or corporations, the actual money isn’t in the bank itself. Instead, it could be spread out into several investments. SVB wasn’t any different, and it goes back to 2020.
According to the New York Times, SVB had doubled its deposits from 2018, when it jumped from $49 billion to $102 billion. From there, it didn’t slow down, reaching $189 in 2021, which had leveled off at about $175 billion by December 2022.
Understanding how the bank made most of its investments is also important. According to the Washington Post, SVB held many Treasury and various government bonds, totaling more than half of its assets. These included long-dated Treasury bonds and mortgage bonds. When interest rates are low, these provide a steady, modest return. So, as the Federal Reserve raised its interest rates, it affected the bonds directly, thus making them less attractive.
While this explains what happened in part, it doesn’t explain everything. For example, the startup environment, which was essential to SVB, was facing a funding winter. By Q4 of 2022, funding had reached its lowest point since 2018.
With such a dire condition, the bank’s clients began demanding their money back. Since SVB had most of the money in investments, it had to sell off some of them. This is normal within the banking world, and, in fact, it’s not unusual for banks to do so, even at a loss.
Investopedia states that most banks have maintained a reserve rate that ranges from 0% to 10% of bank deposits. The latest report indicated that SVB had around $180 billion in deposits, translating to about $18 billion.
According to the Wall Street Journal, SVB had relied too heavily on deposits. By the end of 2022, 89$ of its liabilities were deposits. Let’s compare that to the Bank of America. 69% of its liabilities are deposits.
At the same time, while having a much larger percentage of liabilities as deposits, SVB also had higher pay on deposit rates. Whereas the Bank of America paid 0.96% on average, and the banking industry paid an average of 1.17%, SVB paid 2.33%, almost double.
The problem for SVB was that deposits had continually decreased. The final three quarters of 2022 saw a 13% drop, reflecting the abovementioned situation, a funding winter.
The asset sales totaled around $1.8 billion in losses. Therefore, SVB would aim to raise $2.25 billion in additional capital to ease the bank’s financial losses. The problem is that the situation with SVB worsened because of a series of PR mistakes.
Advisor and founder Lulu Cheng Meservey has provided valuable information in a simple explanation found in this thread.
On March 8, SVB announced common and mandatory convertible preferred stock offerings. The problem is that, according to Cheng Meservey and others, SVB didn’t specify why it was doing so. In the process of doing so, it also filed a form 8-K.
An 8K form is the device with which an entity announces to the SEC (and shareholders) that it’s about to make a significant event. These can include acquisitions, mergers, and, yes, raising capital. Many who have seen the documents consider that SVB provided enough information in the 8K.
The problem is that SVB didn’t include valuable information about the 8K in its communications. In fact, the word didn’t reach those critical to the bank, including investors, VCs, and the very startups who relied on the bank.
Without the input of influential VCs and startups desperate for money, SVB continued with the process, still not using significant channels such as social media, websites, VCs, and Twitter to announce one of their biggest moves in recent times.
At the same time, SVB announced the news on Wednesday, March 9, in the evening. The VC and startup world was reeling from the Silvergate collapse and quickly associated the two situations as being caused by the same reason and having the same dark fate.
As word got out, SVB and CEO Greg Becker took almost 24 hours to communicate with customers and investors. The CEO urged everyone to stay calm, which immediately caused the opposite. In one day, March 9, SVB shares dropped 62% in price.
On March 10, during pre-market trading, the stock plummeted an additional 66%, causing a trading freeze. That same day, the DFPI shut down the bank, and the FDIC created an alternate financial institution to withhold the assets until further notice.
SVB’s collapse is the second largest since 2001, with many people panicking. One of the biggest questions people have is: what happens with the money? Unfortunately, the answer isn’t as clean-cut as people would like.
First, it’s essential to talk about the FDIC’s new bank, the National Bank of Santa Clara. This bank holds the assets that SVB had on hand and the control over investments. The FDIC has made it clear that the bank will operate by Monday. It also clarified two things: checks from the previous bank will clear, and some people can cash out their money.
The term “some” is also essential to this point. According to CNBC, the FDIC’s standard insurance, which now owns SVB’s assets, covers $250,000 per depositor per bank. So, this means that depositors with less or equal to $250,000 should, in theory, get their money back with no issues.
Those who are uninsured will get certificates instead and an advanced dividend within the next week. These certificates would eventually be paid out in the future. However, it’s unclear when and whether uninsured depositors will get their full money back because the news isn’t motivating.
According to Bloomberg, it’s reported that 93% of the bank’s deposits are uninsured. This equals $150 billion.
What happens to the money depends significantly on how the FDIC manages those deposits. The FDIC will likely sell those investments at a loss, and there’s no word yet on whether it will be pennies to the dollar or something more decent.
Brad Hargreaves is a founder and writer who considers SVB’s impact too complex to measure. This is because many startup founders relied on the bank for corporate issues and personal loans and mortgages. Also, it offered wealth management. So it seems that half of Silicon Valley’s money was generally there. The startup world could face a blur between person and company as the FDIC tries to unravel this mystery.
Since SVB was crucial to the startup world, many companies relied on it to pay for everything from investments to payroll. Unfortunately, there are reports of companies having to withhold their pay until next week, and they hope the situation clears.
At the same time, it’s important to note that this massive crisis will have repercussions not only in the startup world but more. This collapse is already sparking reactions and comparisons to 2008. However, the White House has communicated that the US banking system is much more resilient now than in 2008.
The short answer is: expect layoffs. The news, in general, isn’t positive. SVB was ingrained in Silicon Valley; it was its backbone. With 44% of the country’s startups riding its back, there’s no doubt that many will tumble.
Some startups, including Rippling, rush to move operations to JPMorgan Chase, while others cannot act.