It's a Wonderful Life, Twitter Edition: The SVB Collapse
How the Silicon Valley Bank Collapse Unfolded in a Digital World and Exposed the Fragility of Modern Banking
What happens when a bank run goes viral?
The rapid downfall of Silicon Valley Bank in March 2023 serves as a stark reminder of how rising interest rates and digital communication have transformed the dynamics of banking crises. This event not only exposed the vulnerabilities within the banking system but also highlighted the delicate balance central banks must maintain as they tackle inflation.
If you are a startup or have a venture capital fund, Silicon Valley Bank is the bank to work with. SVB depositors choose them because they understand the intrinsic risk associated with their industry and create products that are beneficial to their clients. Prior to March of 2023, SVB has been a solid partner with little to no problems in their history. However, due to rising interest rates, storm clouds began forming in late 2022. SVB is unique in that approximately 94% of their deposits are greater than $250,000,[1] the upper limit for FDIC depositor insurance. Typical big four banks (JP Morgan, Wells Fargo, Bank of America, and Citigroup) are required to submit stress tests to ensure risk never exceeds these levels.
Setting the Stage for Failure
During the COVID-19 Pandemic, the influx of capital to startups grew well beyond the typical growth cycle. Silicon Valley Bank's deposits totaled $49 billion in 2018 and by the end of 2020 they totaled $102 billion. One year later, in 2021, SVB had $189 billion in deposits due to outsized profits during the pandemic.[2] With all of this extra cash, SVB had a responsibility to shareholders to deploy this capital and generate a return for holders of SVB stock. SVB purchased bonds at the absolute low. The bonds lost value because the Federal Reserve has been raising interest rates to reduce inflation. As interest rates go up, bond values go down. The type of bonds SVB purchased were Hold-to-Maturity, meaning a purchaser can’t sell early and must hold for their duration. This meant that SVB had paper losses in excess of $15 billion.[3] See Fed Funds Rate Chart.
On Wednesday, March 8, 2023, Moody’s, the ratings agency, tells SVB they are preparing to downgrade SVB's credit. SVB reacts by getting on a jet to New York to meet with advisor Goldman Sachs, in an effort to attract outside investment and shore up the bank. After word of this leaks to a few high-net worth investors, rumors begin to circulate that Silicon Valley Bank is in trouble.
It’s A Wonderful Life--Twitter Edition
On Thursday, March 9, 2023, Bloomberg reports that Peter Thiel is advising his companies to withdraw money from SVB.[4] In the past, you would see depositors drive to a physical SVB location, stand in line, and ask for their money: a traditional bank run. However, word of SVB’s mismanagement spreads so fast and far that $42 billion was withdrawn in one day. This information was texted, tweeted, and streamed to every SVB depositor. When they learned of this, they didn’t drive to the bank, they pulled up an app on their phone and wired money out to an alternative bank. By Friday, March 10, 2023, it was over. The treasury stepped in and froze accounts. By 9:00pm Venture Capitalists, Startups and Investors were begging for a lifeline.
A weekend of rumors and responses, leads to a red Monday.
On Sunday, March 12, Treasury Secretary Yellen appears on “Face the Nation” and admits that higher interest rates are the cause of the failure at Silicon Valley bank.[5] This statement creates more fear and more rumors over the weekend. If the bank failure was not due to tech industry challenges but due to banks holding bonds with increasing losses, other banks may be faced with a similar fate. This starts a chain reaction with other mid-sized banks getting calls from rating agencies to review their risk. On Monday, March 13, other banks facing a similar fate begin to surface. By the close of trading on Monday, the damage has been done. First Republic Bank, a bank that caters to high-net worth individuals, is facing a similar issue. A high percentage of depositors hold more than $250,000 and are uninsured. Depositors see that they can move cash to a money market account or other fixed income asset yielding 5% and another bank run begins. Just six days later on March 19, S&P had cut its rating twice, down to “B-plus”.[6] First Republic begins looking for a suitor and rumors of investment from outside groups swing wildly. Internationally, ratings agencies begin to look at the impact of rising rates on other banks including Credit Suisse. On March 19, UBS agrees to acquire Credit Suisse on the contingency that the Swiss National Bank backstops losses up to $10b. Just five days later, Deutsche Bank is making headlines as an ongoing concern is facing the banking industry.[7]
Where do we go from here?
Central planners like the Federal Reserve and the European Central Bank are in an exceedingly difficult position. They’ve committed to tackling inflation and have been raising rates accordingly. The ECB increased rates during these events and the Federal Reserve increased rates another .25 basis point on Wednesday, March 21. For every increase, they risk breaking another piece of the banking system. In a certain way, this is what they are hoping for. For each component of the broader economy that breaks, those events can be taken as deflationary. The sooner inflation is under control, the central planners can stop raising rates and perhaps even cut back down to zero if a recession were to occur. There are a couple of factors to consider going forward. Inflation is calculated year-over-year and the peak was last June. As we get closer, even if prices are still high, the inflation growth will show zero and the problem is solved in the eyes of the Fed. The other factor to consider is that mid-size banks hold 80% of commercial real estate loans. Nearly $92b of office debt is due to mature in 2023. If these borrowers can’t refinance rates lower than what they are paying now, defaults may begin accelerating.[8]
Energy Industry Outlook
As economic indicators show a slowdown, then the interest rates will drop, the dollar will weaken, and energy prices will increase. In addition, if a recession occurs than stimulus will be back on, infrastructure projects will be identified, and the use of energy will increase under the auspices of a weakened currency. We will continue to listen closely to the Fed and see how they respond to these economic conditions.
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[2] https://www.nytimes.com/2023/03/10/business/silicon-valley-bank-stock.html
[5] https://www.cbsnews.com/news/janet-yellen-face-the-nation-transcript-03-12-2023/
[6] https://www.reuters.com/business/finance/sp-again-downgrades-first-republic-bank-ratings-2023-03-19/