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Canopy Commentary - The SVB Mess

March 13, 2023

One might be forgiven for thinking that runs on a bank, and banking failures, are a thing of the Great Depression, not something you encounter in modern times.  One would be wrong, thanks to the highly publicized failure of a once obscure institution called Silicon Valley Bank, which collapsed on Friday and was taken over by federal regulators to protect the assets of its depositors.  It was the largest failure of a U.S. bank since the 2008 economic crisis. 

Is there reason to be alarmed?  Probably not.  Silicon Valley Bank (SVB to insiders) was unique in the banking industry.  Unlike most banks that lend money to local residents, small businesses, and corporations, SVB lent to a very exclusive group of companies: tech startups and venture-backed health care companies.  Over its 40-year existence, the bank grew with the tech industry, eventually becoming one of America’s 20 largest lending institutions, with $209 billion in total assets at the end of last year. 

 Unfortunately, in addition to its loan portfolio, SVB also decided to speculate by purchasing approximately $21 billion of long-term bonds which, until recently, were paying relatively low interest rates – their portfolio had an average yield of 1.79%.  When interest rates doubled and then rose again, those bonds became much less valuable at exactly the wrong time - when venture capital firms were experiencing their own shortfalls and were drawing down funds held at SVB.  The bank announced that it had sold a large part of its bond portfolio at a loss, and at the same time proposed to sell $2.25 billion in new shares of the bank to cover those losses.

On this news, many of the venture capital firms decided that it would be safer to move their assets out of SVB, which triggered a disastrous run on the bank.  The bank’s share price went into a free fall, losing 80% of its value in a couple of wild trading days, and California regulators decided they’d seen enough.  On Friday, they moved in to shut the bank down and place it into receivership. 

 The Federal Deposit Insurance Corporation guarantees any deposits up to $250,000, which means that most of the ordinary people who had deposits with SVB will be made whole immediately.  However, many of the Silicon Valley depositors were companies with much larger balances.  Roku has filed reports saying that it had around $487 million parked at SVB, representing about 26% of its cash holdings.  Gaming company Roblox may have been parking as much as $150 million at the bank.  Rocket Lab USA reported at least $38 million of its assets were there as well.  With swift action on Sunday, the regulators designated SVB (and Signature Bank, which also failed) as a systemic risk to the financial system, which means that the full deposit balances, even over the FDIC limit of $250,000, will be fully guaranteed.  Any losses to the FDIC fund will be recovered in a special assessment on banks so that taxpayers will not bear losses.

 This news sent a wave of anxiety into the markets as investors wondered whether this might be a sign of widespread weakness in the banking industry.  Indeed, the exchanges halted trading of several regional bank stocks on Monday morning. 

As you read this, analysts are also looking at whether any of the banks they cover might have put depositor money into cryptocurrencies—whose trading markets went into a still-unexplained turmoil on the SVB news.  We hope that the SVB mess serves as a wake-up call and generates a healthy examination of risks and exposures, which will give the regulators time to sort out hidden risks before they lead to more collapses.