I'm writing tonight's executive briefing on the Silicon Valley Bank (SVB) collapse that's captured the attention of almost everyone today. I'll also publish it publicly for our larger community to read.
Yesterday, if you are like me, you finished a day of meetings and looked at your phone at the headlines around Silicon Valley Bank's stock dropping 60% after hours (only down 20% during regular trading hours). This morning you woke up to the news that Silicon Valley Bank's stock was being halted awaiting "pending news," and by mid-day, Silicon Valley was closed and in receivership.
With $300 billion in assets, SVB's fall is the second-largest bank collapse in American history. With a looming recession and uncertainty about what's to come next, everyone is wondering: "What will happen now?"
To understand what will happen next and why it is happening now, we first need to look at how things came to this point.
Before the federal reserve began to raise interest rates in response to inflation, Silicon Valley Bank invested a significant portion of its assets in long-dated bonds. As interest rates rose, the value of SVB's bonds fell, and its net margin—the difference between assets' yield rate (what it earns on those assets) and what it pays out in expenses—declined. As interest rates rise, the cost of funding new loans increases. All this while deposits are decreasing because of the lows in venture capital investments over a year ago.
To rebalance its portfolio, SVB recently sold $21 billion worth of bonds realizing $1.8B of unrealized losses[1]. As a result of that loss and decrease in deposits, SVB's management announced they would raise $2B in new capital by issuing shares, with General Atlantic committing $500 million. As this news became public and spread, the concern for the bank's liquidity and customer access to cash, there was a significant outflow of deposits on Thursday, March 9. Investors panicked, SVB's stock dropped 60%, management explored a quick sale, and by mid-day on Friday, March 10, California banking regulators closed the parent company, SVB Financial Group, and put its assets into receivership with the FDIC[2].
The FDIC announced that by Monday, March 13, "All insured depositors will have full access to their insured deposits." What's important here is that the FDIC insurance limit is $250,000, so only the funds under this limit are guaranteed. The FDIC also noted, "The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors. [3]”
The immediate impacts of this collapse are significant, starting with its customers. By Monday, customers will have access to a maximum amount of $250,000 in an account. This means that if their next payroll is more than $250,000 and their only bank is SVB, they won't be able to make that payroll. In most cases, if there's no access to funds beyond $250,000, most businesses won't be able to make subsequent pay cycles over the coming weeks or months. This inability to make required payments will continue beyond payroll to things such as office leases and commercial loans.
Beyond the impact on its' immediate customers, Silicon Valley Bank provides an infrastructure for the facilitation of payments, such as payroll. A well-known payroll company, YC-backed Rippling processed payroll for their customers through SVB's rails and immediately noticed payroll delays that should've arrived in employees' accounts today. Rippling announced that they've begun and finished the immediate shift to managing this process on top of JP Morgan Chase.
The FDIC plans to maintain normal operations for SVB's customers, analyze the assets and liabilities at SVB, and seek to sell these to another bank within the next 90 days. This is probably the most critical part of what's to come, as the value of the sell against the net assets will determine how much of the uninsured deposits are paid back to customers and other debtors of SVB.
There are lessons to be learned and much more news to come, hopefully better.
This collapse highlights the importance of diversifying your banking relationships as an individual or on behalf of your organization. For SVB customers with accounts at four different banks, only 25% of the money in excess of the FDIC limit would be at risk when this chaos struck. Diversifying at this level Is an example of how critical It Is for businesses to evaluate and manage those risks effectively.
While the federal reserve made it clear that they'd increase interest rates, SVB didn't move fast enough to evaluate how this would affect their portfolio and make adjustments. To be forced to sell those assets at such a massive loss of $1.8 billion was the result of their poor timing. Whether a bank or the founder of a company generating $5 million per year, you have to be aware of what's being forecasted and predicted In the economy and plan for what could happen. I.e., For the past year, I've focused on increasing our sales and diversifying our customer base in light of macroeconomic trends. SVB is a very niche bank, primarily serving venture-capital funded companies —which often have irregular cash flows and a loss In VC Investments, Impacting cash deposits compared to broader peers In the sector.
While finishing this briefing, the press reported on an 8K filing from Roku that stated it had 26% (~$487M) of its cash at Silicon Valley Bank. I'm sure more reports like this will come over the coming hours and weekend.
[1] https://fortune.com/2023/03/10/svb-collapse-fdic-takeover-martin-gruenberg-620-billion-hole-banks-balance-sheet/
[2] https://www.cnbc.com/2023/03/10/silicon-valley-bank-is-shut-down-by-regulators-fdic-to-protect-insured-deposits.html
[3] https://www.fdic.gov/news/press-releases/2023/pr23016.html
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