Silicon Valley Bank Collapse; What Happened?

The financial institution best known for its associations with well-known world technology startups and venture capital, Silicon Valley Bank, experienced one of the eldest problems in banking - a bank run - which led to its failure on Friday. The 40-year-old bank placed as the 16th-largest in the U.S. before its failure and is the largest financial institution to collapse since Washington Mutual at the height of the financial crisis in 2008.

In 2021, the Bank experienced a big inflow in its deposits, which increased to US$189.20 billion in 2021 from US$61.76 billion at the end of 2019. As a result, SVB was not able to increase its loan book fast enough to produce the return it wanted to see on this capital. Therefore, the bank invested more than US$80 billion in mortgage-backed securities for its hold-to-maturity portfolio and almost 97% of these MBS of more than 10 years in duration, with a weighted average yield of 1.56%.

On the other hand, with the increase in interest rates by Fed Reserve, the value of SVB’s MBS tumbled and investors can now buy long term risk free bonds from the Federal Reserve at a 2.5x higher yield. The bank announced that they had sold US$21 billion of their Available For Sale securities with a loss of US$1.8 billion, and were raising another US$2.25 billion in equity and debt. This announcement surprised the investors who had the impression that the bank had sufficient liquidity to avoid selling their AFS portfolio. This causes the SVB’s share price to fall more than 60%.

Update in the SVB Bank Collapse:

According to a joint statement released by the Federal Reserve, the Department of the Treasury and Federal Deposit Insurance Corporation (FDIC), “All SVB Bank’s depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”

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