SVB collapse - Where it all started?

16th largest bank in the US. Once seen as a significant tech banking player, SVB's stunning collapse spurred other bank closures, rattled global markets, and threatened the livelihoods of start-ups across the country. SVB opened in 1983 to serve fledgling tech companies. Eventually, nearly half of the country's venture capital-backed technology and life sciences companies would rely on SVB Roku, ROBLOX, and many others put millions into the bank, helping SVB become one of the nation's largest. These are companies that move quickly, and their money moves rapidly. They promptly moved their money out of the bank when things went off the rails

After the banking crisis that triggered the Great Recession, President Barack Obama signed the Dodd-Frank Act, making banks like SVB face stricter regulation. It is designed to ensure that everybody follows the same rules. But eight years later, during the Trump administration, some of those regulations on smaller banks were rolled back Some rules were moved back for these banks with less than $250 billion in assets. SVB was flooded with cash two years later as businesses deposited more during the pandemic. Deposits tripled to $189 billion in two years, making 2021 SVB the most profitable year ever. So SVB Financial took that cash and bought tens of billions of dollars of longerterm US treasuries and government-backed mortgage securities.

After SVB had stockpiled that hundred billion dollars plus in bonds, interest rates rose suddenly. Banks, including SVB holding many bonds, were sitting on many losses. And so all of a sudden, the gap between what SVB had paid for those bonds and what they were worth on paper had jumped to more than $17 billion, and that was the critical risk that would eventually lead to SVB's undoing.

The bank's deposits were held in 37,000 accounts with over $250,000 The amount insured by the FDIC. Then in a regulatory filing on March 8th, SVB announced it sold a large chunk of securities at a loss of about $1.8 billion to help cover that decline in deposits.

The stock fell a tremendous amount, which is never a good sign. Crypto-focused bank Silvergate had just announced it would wind down and return all warranties Start-up CEOs began receiving urgent calls from panicked venture capital investors. As word spread across the valley, what started as a trickle of withdrawals quickly became a tidal wave More and more start-ups pulled their cash The bank's stock price fell the next day as customers tried to withdraw $42 billion in deposits. SVB ran out of cash. The bank has enough money to cover deposits if they come out peacefully and orderly. When everyone's racing for the exits at once, it doesn't That day, regulators seized the bank But the bank had over $151 billion in deposits that weren't insured at the end of 2022. They were over the $250,000 limit.

SVB's focus on Silicon Valley made it uniquely vulnerable to a run. Its fortunes were tied to the fortunes of this one industry. But what's more, this is an industry that has flighty deposits One can't rely on short-term funding to support these long-term investments and bonds. With investigations into SVB underway, the bank's clients will see their money returned. But shareholders are still looking for a way to get through.

Author: Bhargavi Siram