On March 13, 2023, the financial crisis surrounding the collapse of Silicon Valley Bank was averted in just four days. Forty-four hours after a run on the bank, it was in liquidation.
By Sunday evening in the US, a trio of US authorities stepped in to prevent the collateral damage that threatened to bleed to other banks and annihilate $US175 billion deposited into Silicon Valley Bank by small technology companies and start-ups.
There was no slow-motion build-up to the bank’s implosion, and there was no widespread public worry about the state of its balance sheet. SVB was basking in the freshly minted accolades from Forbes naming it one of America’s best banks.
It wasn’t until mid last week when SVB announced an equity raising to bolster its coffers that a couple of big technology investors told their companies to pull their deposits. That news spread like wildfire, and within days liquidators were called in.
Regulators understood well that this was a situation that required nipping in the bud. Attempts over the weekend to find a larger financially stable bank to buy and thus bail out SVB by the time US markets start trading on Monday were not successful.
The intervention by the Federal Reserve, Treasury and the Federal Deposit Insurance Corporation wasn’t just about looking after these depositors, it was designed to avoid contagion.
Silicon Valley Bank had a peculiar set of issues, which created a perfect storm. Its deposit base was disproportionately large, and these funds were over-invested in bonds and mortgage-backed securities, both of which had radically devalued over the past year as interest rates rose.
The rapid rise in interest rates also limited the tech company’s ability to find equity to fund their expansion, and they had been eating into their deposits at a faster rate. The deposit base was also particularly concentrated, thus a smaller number of withdrawals could have an outsized impact on the bank’s funds.
The bank’s misfortune sits clearly in the hands of its management, as does what appears to be inadequate hedging to mitigate the risk of its over-exposure to bonds and mortgage-backed securities.
The larger threats have been removed, but there will be some more pain for small tech companies that depended heavily on SVB.