On March 9th, Silicon Valley Bank’s stock dropped 80%, triggering a classic run on the bank.
SVB is the go-to bank for VC funds and tech money. The 40 year-old bank has been wildly successful, growing from $49B in 2018 to $102B in 2020. At the end of 2022, the bank had than $175B in customer deposits.
Its success led to more capital than it could profitably deploy. The bank
therefore increased its investment in US treasuries and mortgage-backed securities. When the fed increased rates, the value of these investments dropped,
particularly as Janet Yellen indicated that interest rates were likely to
continue to rise.
In an effort to shore up its balance sheet against depositor liabilities, the bank sold $21B of these long-term investments at a $2B loss. Depositors, principally VC managers, interpreted this as an indication of insolvency or potential insolvency. The VCs withdrew their money and counseled their start-up investments to do the same. The result was a classic George-Bailey-Wonderful-Life run on the bank with depositors racing to withdraw their funds, causing a collapse of the bank’s shares.
Unfortunately, SVB’s greatest asset - a heavy concentration and specialization in California tech money - was also it's greatest weakness. The over concentration was a material under-diversification risk.
SVB’s stock collapse has triggered market-wide concerns about the health of the banking sector. First Republic Bank has also been affected. Like SVB, FRB is heavily concentrated in a narrow sector. Its principal assets are invested in California real estate, a similar problem of under diversification.
As of this morning, FRB’s shares had fallen nearly 50% from it's February high of $147, a far greater loss than the market’s overall 2% decline, largely driven by a $52B loss among the four biggest US Banks.
The overall opinion is that SVB did this to themselves: an epic failure of messaging. The move to sell the long-term investments is objectively a conservative move meant to signal prudent management. The news unfortunately coincided with an announcement that the bank was raising funds, which – independently – would have also been seen as a prudent move.
But one coming after the other was interpreted as an indication of liquidity problems. (It also didn’t help that the announcements coincided with crypto Siliverbank announcing that it was winding down operations.)
As of this morning, the bank has been closed and is under management of the FDIC. The best course for SVB is to find a white knight who will acquire the bank and salvage it’s value. Although there is some speculation, no one has yet emerged as a probable candidate.