March 2023
Silicon Valley Bank (SVB) is the 16th largest in the U.S., with $209 billion in assets as of Dec. 31. It is by far the biggest bank to fail since the Global Financial Crisis, second only to the crisis-era shutdown of Washington Mutual (WAMU). Here are some points we find are most relevant and valuable to know to keep in mind currently:
- SVB received many deposits during the COVID era as its primary clientele were venture capital firms and the start-ups that were funded by those venture capital firms.
- Like most banks, a large portion of those deposits was used to purchase long-dated treasuries. Doing so would earn the bank some yield in a very “safe” investment.
- As we all know, over the last year long-dated treasuries have lost substantial value. This put SVB on the hook to replace those losses for the customers whose deposits were used to buy the treasuries.
- Over the last few months, withdrawals from the bank accelerated for various reasons. Specifically, it appears many of the start-ups funded by the VC companies needed more cash to sustain business operations as the economy slowed.
- The combination of faster-than-expected withdrawals and the treasury investment losses created a fear that SVB did not have enough money to cover the withdrawals.
- That fear created even more withdrawals, which in turn created a classic “run on the bank.”
- Friday morning the FDIC placed SVB under its control, followed by an announcement that the Federal Reserve, FDIC and Treasury have devised a plan to backstop depositors. More details will surely come.
Photo Credit: Sundry Photography – stock.adobe.com
The Bottomline:
While this is a fast-moving situation, our current analysis is this does not imply a system-wide issue with the banking industry. While it is a standard business practice to buy treasuries with deposits, there are details with SVB that make it somewhat unique, such as the type of clientele it serves. However, this failure does highlight the pressure banks are under given the losses in treasuries over the last year, but capitalization requirements from post-2008 show most systemically important banks are still healthy. We will continue to track the data to determine if contagion becomes an issue.
Source: Helios Quantitative Research, Bloomberg
