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CIO Perspective: The SVB Collapse

CIO Perspective: The SVB Collapse

March 14, 2023

Given recent market events, we're providing our perspective on the Silicon Valley Bank collapse.

Background

  • SVB is a core bank for technology and healthcare start-ups, which started in 1983 in Santa Clara, California
  • Large proportion of SVB’s deposits consisted of institutional start-ups and venture capital firms relative to typical retail deposits
  • Became the 16th largest bank in the United States with around 212 Billion in Assets as of 12/31/2022
  • Became a publicly traded company in 1988 on Nasdaq 100

Series of events thus far:

  1. Federal funds rates increased from near 0% beginning of 2022 to 4.75% impacting bank balance sheets
  2. Last Tuesday, Powell testified and struck a continued hawkish tone to continue federal rate increases
  3. SVB announced it sold $21 billion in securities at a loss of $1.8 billion and seeking to raise $2.25 billion in capital ($1.25 billion in common stock and $500 million in convertible preferred shares and 500 million additional contingent on $1.25 billion common stock offering)
  4. Depositors withdraws money that overwhelms the bank in combination with lack of liquidity to meet the demands
  5. US Regulators took control of the Silicon Valley Bank on Friday, March, 10, 2023
  6. FDIC announces that all depositor’s money will be available March 13, 2023
  7. Federal Reserve will have additional funding available to banks to meet the needs of depositors through a Bank Term Funding Program (BTFP)
  8. FDIC planning second attempt for SVB auction

What happened?

SVB had a book of short-term deposits which a large percentage comprised of loans and securities from early-stage technology and early-stage life science/healthcare companies. These types of clients typically have high cash-burn rates but also high balance depositors of SVB. SVB like all financial institutions are sensitive to interest rate changes, dependent on generating profit through the interest rate spreads. Secondly, most of SV’s assets were long term “hold-to-maturity” assets rather than “available-for-sale” hid in plain sight, openly disclosed in their financial disclosure.  The sudden withdrawals ultimately led to a fire-sale of “available-for-sale” securities which ultimately resulted in insolvency.

Why it happened?

  • Most of SV’s assets were long term “hold-to-maturity” assets which is not subject to 1) mark to market and 2) difficult to sell, which, as a result can result as a loss to the bank when forced to liquidate 3) asset-liability mismatch
  • Interest rate spreads
    • SVB’s interest rate spreads were affected by loans, investment securities, deposits and other liabilities
    • There was a mismatch between the interest rate paid by SVB on liabilities versus the interest rate earned by SVB’s assets

Consequences?

  1. US consumer confidence in banking system:
  • FDIC insured bank, US depositors will get their money back up to the $250,000 amount per individual per bank
  • Federal Reserve coming to the rescue: SVB allowed to take a loan of up to 1 year from the Fed to get their values at par
  1. Contagion
    • SVB has international subsidiaries and offices in the UK, Canada, Germany, Cayman Islands and joint venture bank in China
    • HSBC to buy SVB’s UK unit; BOE says banking system safe
      • Less than 10% of total revenues are driven by foreign clients
    • 2nd bank was closed by US Regulators on Sunday, second bank failure in 3 days
      • Signature Bank was exposed to crypto banking
    • Regional banks that have less diversified book of assets relative to US big banks may already be affected by the increase in interest rates
  1. Longer term effects on banking structure and governance

Markets & Investing (as of 3/13/2023)

Financial markets in the first minutes of trading on Monday, March 13th saw a large decline. To no surprise, financial services sector saw losses across the board. SVB’s stock fell 60.4% from Wednesday to Thursday. First Republic bank felt the contagion falling as much as 75% on Monday (03/13/2023) resulting in a trading halt. S&P 500 and Nasdaq ended negative for the day.

In the short term, SVB’s collapse as mentioned above can potentially reveal more weakness in regional bank balance sheets. However, U.S. regulators have shown that they’re willing and ready to protect depositors - both insured and uninsured. The Fed’s path of interest rate hikes may be put on pause from this occurrence as they grapple with increased market volatility and consumer fear. Perhaps this may add economic weakness for the U.S. economy, however, staying invested and well-diversified across sectors, market capitalization and regions may insulate idiosyncratic events such as this.

Sources: Forbes, Wall Street Journal, Bloomberg, JP Morgan Asset Management, The Conference Board, SVB 10-K

DISCLOSURES - THE PACIFIC FINANCIAL GROUP

The information presented is the opinion of TPFG and is believed to be accurate but has not been independently verified. TPFG makes no warranties as to the accuracy of the information or any representations made or implied. Articles cited/linked to are the express opinion of the third-party author. There are no affiliations between TPFG and any third-party links. All information may be changed without notice. The information should not be construed or interpreted as an offer or solicitation to purchase or sell a financial instrument or service and should not be relied on or deemed the provision of tax, legal, accounting or investment advice. Past performance is not a guarantee of future results. All investments contain risks to include the total loss of invested principal. Diversification does not protect against the risk of loss. Silicon Valley Bank is not affiliated with The Pacific Financial Group, Inc. (TPFG).