Silicon Valley Bank (SVB), the bank that specializes in providing financing to tech startups, recently collapsed due to a classic run on the bank. The bank’s collapse was triggered by several factors, including the Federal Reserve’s decision to raise interest rates, which led to higher borrowing costs and reduced the momentum of tech stocks, and a drying up of venture capital, which forced startups to draw down funds held by the bank. This resulted in a mountain of unrealized losses in bonds just as the pace of customer withdrawals was escalating.
Last Wednesday, SVB announced that it had sold a bunch of securities at a loss and that it would also sell $2.25 billion in new shares to shore up its balance sheet. This triggered a panic among key venture capital firms who advised companies to withdraw their money from the bank, resulting in a run on the bank.
The collapse of SVB highlights the risks of bank runs and the importance of maintaining adequate reserves of cash and other liquid assets to mitigate the risk of a run occurring. It also demonstrates the impact that a single bank’s collapse can have on the wider financial system. In this article, we will examine the factors that led to the collapse of SVB and the opinions of experts on the issue.
Factors That Led to the Collapse of SVB
SVB was founded in 1983 and has since grown to become one of the top 20 American commercial banks, with $209 billion in total assets at the end of last year. The bank provides financing for almost half of US venture-backed technology and health care companies, making it a critical component of the US tech ecosystem. However, several factors contributed to the bank’s collapse.
The Federal Reserve’s Decision to Raise Interest Rates
The Federal Reserve began raising interest rates a year ago to tame inflation, which led to higher borrowing costs and reduced the momentum of tech stocks. Higher interest rates also eroded the value of SVB’s $21 billion bond portfolio. As the bank’s bond portfolio declined in value, the bank’s capital ratios also deteriorated, making it more vulnerable to a run.
Drying Up of Venture Capital
Venture capital began drying up, forcing startups to draw down funds held by SVB. This led to a mountain of unrealized losses in bonds just as the pace of customer withdrawals was escalating. The bank’s ability to sell these securities at a profit was further hampered by the market’s lack of liquidity.
Run on the Bank
Last week, SVB announced that it had sold a bunch of securities at a loss and that it would also sell $2.25 billion in new shares to shore up its balance sheet. This triggered a panic among key venture capital firms who advised companies to withdraw their money from the bank. The bank’s stock began plummeting on Thursday morning and by the afternoon, it was dragging other bank shares down with it as investors began to fear a repeat of the 2007-2008 financial crisis.
The collapse of SVB has sent shockwaves through the financial industry, with many experts weighing in on the issue. Here are some of their opinions:
Bill Ackman, CEO Pershing Square, Co-trustee
Bill Ackman is one of the more respected and influential persons in the US financial sector. He tweeted, “From a source I trust: @SVB_Financial depositors will get ~50% on Mon/Tues and the balance based on realized value over the next 3-6 months. If this proves true, I expect there will be bank runs beginning Monday at a large number of non-SIB banks. No company will take even a tiny chance of losing a dollar of deposits as there is no reward for this risk. Absent a systemwide @FDICgov deposit guarantee, more bank runs
However, some analysts and experts have pointed out that the collapse of Silicon Valley Bank may have been due to more than just external factors such as interest rates and venture capital drying up. In a thread on Twitter, MacroAlf, the founder and CEO of TheMacroCompass.com, stated that SVB’s financial statements revealed “how horrific they were at risk management” and suggested that “moral hazard must have been at play.” He also raised concerns about the large amount of bonds on SVB’s balance sheet and how the bank hedged against interest rate risk.
Other experts have echoed these concerns about the risk management practices of SVB and other banks in the tech sector. In an interview with CNBC, Karen Petrou, managing partner of Federal Financial Analytics, said, “The risk management of these banks has always been very weak. They don’t have the same kinds of controls that traditional banks have. They don’t have the same kinds of expertise. They don’t have the same kinds of boards that are looking at the risks of these institutions.”
Petrou also highlighted the potential impact of a bank run on the wider financial system, stating that “if you have a lot of banks like this and they start going down, then you’re going to have a financial crisis. That’s the risk.”
The collapse of Silicon Valley Bank may also have broader implications for the tech industry as a whole. SVB was a major provider of financing for startups, and its collapse could lead to a funding crunch for many young companies. As Tarric Brooker, an Australian analyst, noted in a Twitter thread, “Venture debt is how the vast majority of Silicon Valley start-ups survive their first few years. It allows them to get off the ground and build up their operations while they search for profitability.”
The collapse of SVB could also have ripple effects on the broader economy. As Bill Ackman noted in his tweet, “Absent a systemwide FDIC deposit guarantee, more bank runs begin Monday am.” A run on banks could lead to a contraction in lending, which in turn could lead to a slowdown in economic growth.
In response to the collapse of Silicon Valley Bank, policymakers and regulators may need to take a closer look at the risks posed by specialist banks that cater to the tech industry. As Karen Petrou noted in her CNBC interview, “We need to have a better regulatory regime that actually looks at the risks of these institutions and takes them seriously.”
Overall, the collapse of Silicon Valley Bank serves as a warning of the risks posed by specialist banks that cater to the tech industry. It highlights the importance of risk management and the need for regulators to closely monitor these institutions. It also underscores the potential impact of a bank run on the wider financial system and the broader economy. As the fallout from SVB’s collapse continues to unfold, policymakers and regulators will need to take action to mitigate these risks and ensure the stability of the financial system.