The Silicon Valley Bank Collapse: Background, Opinions, Market Reaction

What do we know about Silicon Valley Bank?

• SVB was ranked 16th in the list of the largest US banks, its capitalization exceeded $200 billion.
• The bank’s main clients are technology start-ups that have received financing from venture investors (the bank helped finance more than 30,000 projects).
• The SVB bankruptcy was the biggest banking collapse since Washington Mutual Bank in the 2008 crisis.
• According to Pavel Ryabov, an independent financial analyst and author for the investment channel Spydell Finance, when comparing bank assets within the dollar system (minus investment banking divisions), SVB is on a par with “monsters” like Morgan Stanley, State Street and Bank. of New York Mellon.

What happened: timeline of events

• In February, Forbes published its annual ranking of the best banks in America, where SVB appears for the fifth consecutive year. In 2023, it ranked 20th. The bank announced this news on its social networks on March 6.
• On March 9, SVB Financial, the bank’s parent company, reported an emergency sale of $21 billion in bonds from its portfolio and a subsequent loss of $1.8 billion.
• Venture capital funds advised new portfolio companies to withdraw funds from SVB due to concerns about the bank’s financial stability, which investors did.
• The massive outflow of funds put the bank’s liquidity in doubt. SVB shares collapsed by 60% in two days, as a result of which trading in its securities was stopped.
• At the moment, SVB is bankrupt, all assets were transferred to the administration of a specially created FDIC institution – the Deposit Insurance Bank of Santa Clara.
• As of March 13, payments to clients on insured deposits will begin, but these, according to various estimates, are 3-7%.
• By the end of 2022, 89% of SVB’s deposits totaling $175 billion were uninsured.
• For customers with uninsured deposits, the FDIC promised to receive an initial dividend and a management certificate for the remainder of their uninsured funds.
• The commission intends to sell the bank’s assets and thus obtain adequate financing for these promises.

previous requirements

• Some experts attribute the bank’s failure to the decline in the market for technology start-ups. According to Business Insider, “The general downturn in the tech market has clearly not helped. Specializing in banking has its benefits (nearly half of all startups in the US are financed with SVBs), but it also comes with risks: Your clients’ pain quickly becomes yours.
• But most analysts are inclined to think that the reason lies in the measures to regulate the monetary policy of the US Federal Reserve System.
• SVB had more than $120 billion of equity investments, with more than 85% in long-term bonds (including mortgages).
• Due to the Fed’s policy, throughout 2022 there was an exorbitant increase in interest rates in the US debt market, which is why many securities fell in price. The unrealized loss of SVB also increased proportionally. Even redeploying funds into short-term stock assets didn’t help. As a result, “in February 2023, after another rate hike, the balance sheet turned negative (losses exceeded $20 billion) and everything fell apart,” writes Pavel Ryabov.
• The analyst also points to an important feature of the event: the bank hushed up the problems, reported a profit of $1.7 billion, and did not go into detail about the breach. After falling towards the end of 2022, SVB shares “recouped all losses in early February with a cumulative gain of more than 75% in just 1.5 months.”
• And yet, as soon as it became known about the emergency sale of bonds and plans to place shares for $ 2.25 billion to find funds to cover losses, investors began to panic, who began to hastily withdraw funds. (about $40 billion – more than 20% of the deposit base) and so “finished” SVB.
• Few tried to warn the industry against overreacting, but there were too few, too late.
• CFRA equity research analyst Alexander Yokum is confident that SVB would not have lost money were it not for the influx of panicked customers.
• “SVB gave the technology industry 40 years. The tech industry couldn’t give the bank 40 hours,” Business Insider wrote about it.

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• In fact, most analysts in everything that is happening are confused by the rapidity of the actions of US regulators.
• “This may indicate not the size of the hole in the balance sheet, but the coordinated policy of the Fed, the US Treasury and the FDIC together with the major players. It could not be without their approval and participation. Here, it is practically a tracing role with Lehman Brothers, which collapsed with the direct participation of famous people (I will not point fingers) in the Fed, the Treasury and the largest US banks, ”said Pavel Ryabov .
• A similar opinion is shared by Business Insider experts, but they add one more aspect: “It is possible that some serious accounting irregularities at SVB will be discovered in the coming days and weeks, which will indicate that the bank was only delaying the moment. That it was a matter of time before everything collapsed. A press release from the California Department of Financial Protection and Innovation on Friday said the regulator took over SVB due to “insufficient liquidity and insolvency” but did not provide further details.
• However, a Morgan Stanley report from the same Friday said the bank was confident that SVB “has more than enough liquidity to finance the outflow of deposits associated with investment funds from venture capital clients” (Morgan Stanley estimated available liquidity from SVB at $180 billion).

“An Extinction Level Event for Startups”

• Be that as it may, the collapse of SVB is already affecting the startup market, and according to many, the situation will only get worse.
• The CEO of the world’s leading startup incubator Y Combinator, Harry Tan (his company helped launch Airbnb, DoorDash, and Dropbox) called the collapse of SVB “an extinction-level event for startups.”
• Most of the bank’s clients, tech startups, are already in critical condition, as their accounts are locked. And it is not known if the unsecured funds will be available. One of the most evident problems in this regard is the lack of funds to pay salaries and finance the regular expenses of the companies. And it happened to them overnight: on Thursday everything was calm!
• In addition to the financing of the core business, SVB also offered clients health insurance and mortgages, that is, in these areas, startups and their teams will also suffer unplanned losses.
• Almost all experts are sure that one way or another the companies will recover their funds, but the question is when exactly this will happen, because being in a crisis situation for a month or six months is a significant difference for any startup.
• “Some startups won’t survive the collapse of SVB,” says Kirill Kulikov, co-founder of Beau, a b2b2c startup in which Y Combinator invested. – In some surviving startups, the crisis will also affect employees: probably many salaries will not be paid on time already in March-April. Payroll for corporate America is sacred, and it will be especially interesting to watch investor support for startups: Will they be willing to provide bridging loans in exchange for wages? Some venture capital funds are already pledging public support for portfolio companies. It remains to find out what will happen not with words, but with deeds.
• Obviously, SVB clients will have to find where to store their funds now. Many will turn to the world’s largest lending institutions to hedge against repeat risks. But someone will think about neobanks. Kirill Kurikov points out that Brex and Mercury have already stepped up and started bombarding potential clients with offers of emergency bridging loans.
• Some startups are trying to make a profit out of the situation: For example, the former BuzzFeed marketing director and founder of the experimental toy store Camp sent out a customer newsletter with a promo code for bankruptcy discounts and urged customers to help the company because “it needs your help; unfortunately, most of our company’s cash was in a bank that had just collapsed.” You can read about the stories of other startups and their vision of the situation in the Techcrunch material.

The reaction of global markets.

• The panic caused by the collapse of SVB extends well beyond the United States. Techcrunch, for example, writes about how it expands into China, the world’s second-biggest venture capital market. On social media platforms, investors and startups are rushing to share news articles about the fiasco and thoughts on preventing their own disaster.
• Since SVB’s clients have spread all over the world, the effects of bankruptcy will be felt globally.
• “As well as being a major blow to the tech industry, the collapse of the SVB raised concerns about banking risks in general,” the BBC writes, referring to the same rate hikes and depreciation of bond portfolios in general for all. US banks and their clients around the world.
• Shares of big US banks rallied after Friday’s turmoil, but smaller banks were forced to halt trading.
• A week in the stock market following the events with the SVB sent the Nasdaq down 1.7%, the S&P 500 1.4% and the Dow 1%.
• Commercial real estate is also at risk: Entrepreneurs have taken out many fixed-rate loans, all of which will soon need to be refinanced at higher interest rates.

• The situation with SVB has already started to have an impact on the crypto market. The second largest stablecoin, USDC, has lost its peg to the US dollar, which Coinbase also attributes to the bankruptcy of the bank, where USDC cryptocurrency issuer Circle has around $3.3 billion (8% of the reservations) that cannot be accessed.

• At the same time, some analysts also note a slight positive effect of the collapse of the SVB: it is that in the current crisis situation, the Fed, which planned to raise the rate again by 0.50 percentage points, will have to moderate its ardor and be limited to an increase of only 0.25 percentage points (the meeting is scheduled for March 22).

PS Elon Musk could not miss such an informative occasion either and wrote on his Twitter that he was open to the idea of ​​buying SVB, which caused a mixed reaction from users.