Why Silicon Valley Bank Collapsed, In Simple Language

I have been reading on SVB to figure out what happened and why?

It's important to me for two reasons:
1) I'm an investor (not in SIVB). Always be learning!
2) I'm a customer (of SVB), which directly impacts us (not critical).

Let's dive in!

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Interest Rates (Part I)

SVB had a bunch of bonds. Those bonds' values declined as the interest rate went up. That's just what bonds do. SVB could have held the bonds and gotten paid the coupon value at maturity.

But instead, SVB sold tons of bonds at a loss! WHY?

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Revenue

Look at the last earnings results slide (attached). Does it look like a company that goes out of biz in 2 days?

1. Record fee income in 22 ($1.2B)
   
2. Healthy loan growth (show bring higher interest income)

So why did it sell tons of bonds at a loss and raise money?

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Interest Rates (Part II)

You need to know that lots of the banks' customers started moving their cash to interest-bearing accounts, which means higher costs for SVB. According to SVB, each % point decrease in non-interest-bearing deposits would reduce its net interest income by $3M.

In summary:

• SVB's net income was going down due to customers wanting interest.
  
• It would've been fine if startups were raising & depositing money. But that wasn't happening.
  
• VCs & PEs have ~2.6T cash collecting interest & not being invested.

Didn't SVB have cash on the balance sheet?

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Balance Sheet

The company targeted $7-$11B in cash. GOOD
It also had $117B Corp bonds, T Bills, Municipal bonds: GOOD

Really, Good?

If you have $117B in securities, why do you need to raise $2.2B, which started the SVB collapse this week?

Embrace yourself...

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Interest Rates (Part III)

Context: banks hold their securities in two buckets: Available to Sales (AFS) and Hold to Maturity (HTM).

With HTM, if the value of your securities goes down, you don't take any loss on the balance sheet. It's held to maturity.

With AFS, you take the loss on the balance sheet if the value goes down.

As the interest rate increased, the value of those lovely "secure" assets SVB held dropped rapidly.

Technically, any bank can be insolvent, but the balance sheet doesn't show.

Now, we hit the real story!

My educated guess: SVB realized that with the deposits not coming as fast, VCs not investing, everyone wanting interest & their assets losing value by the minute, they may be insolvent.

What to do:

1. Sell AFS
   
2. Raise capital

GOOD? No!

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Market Phycology & Mechanics

Market Psychology

1. SVB announced on the day crypto bank Silvergate collapsed.
   
2. VCs warned startups.
   
3. Founders Slack groups & WhatsApp chats blew up! To survive, you must be faster than the other founder and withdraw your money.

The madness began, and market mechanics took over:

1. The stock market went crazy, shorting & some buying the dip!
   
2. Trading halted several times, and that's always the worst.
   
3. Regulators intervene (FDIC) and shut it. (Regulation isn't that bad, huh?)

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Some Observations (3/10/2023)

That's what I have learned so far. Thanks for reading!  Things may change, and new information may impact my conclusions.  Here are some observations and lessons:

1. There are other banks with the same at-risk balance sheet. Which ones?
2. The Fed must watch the situation. It's not just interest rates and inflation that they are influencing. 
   
3. Retail investors: Don't buy any dip?
4. If you are a customer, like we are, and in the FDIC threshold, like we are, calm down! But get ready for a hell of admin work and emails from every other vendor you work with. They all want you to have you (ahem, help).

Hope you found this helpful!

Fortune favors the intelligent!
Hoda, Founder and CEO of StockCrd.io
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