The Shocking Collapse of SBV
An Insight into the Biggest U. S. Bank Failure since 2008
B. N. Dent
“It is easier to rob, by setting up a bank, than by holding up a bank clerk.” – Bertolt Brecht
Due to high levels of regulation, diversification, and risk management, the abrupt collapse of prestigious banks is not a common occurrence. However, when these institutions do collapse, there are brutal consequences for the stakeholders involved, often resulting in a financial bloodbath. Depositors and investors can lose millions of dollars, and a chain effect can occur whereby other institutions who are tied to the collapsing banks also suffer and can also collapse.
Just recently, as of March 10th, Silicon Valley Bank, the United States’ sixteenth largest bank, was shut down by federal regulators, and depositors and investors were left petrified, fearing that they would never see the money they put into the bank again.
Founded in 1983 and based in Santa Clara California, SVB, was a publicly listed commercial bank that provided services for companies at all levels, but particularly focusing on technology start-ups. As of 2021, SVB was in control of 189 billion dollars USD in deposits alone. Fuelled by the 2020/21 tech boom, this was a growth from just 65 billion dollars USD in deposits in 2019. So how did this behemoth of a bank crash and burn?
The three main contributors to the bank’s collapse were its extremely low liquidity (the efficiency at which an asset can be converted to cash without affecting its market price), the collapse of the tech boom, and rising interest rates.
Low Liquidity
Amidst the seemingly utopian market conditions during the 2020/21 tech boom where interest rates were low and it seemed like the value of everything was rising, SBV experienced massive growth in terms of deposits as their tech clients were receiving large amounts of funding and needed a place to store this capital. Observing the great market conditions, and looking into the future with an optimistic lens, SBV essentially came to the conclusion that, due to the vast amounts of funding within the market, their customers would not have a need to withdraw their deposits any time soon. Therefore, SBV decided to invest these new deposits into long term fixed income securities, mainly government bonds. For those unaware, this process of investing the deposits of customers is not illegal, and it is the main way in which banks generate revenue. That being said, it does expose them to vulnerabilities. SBV invested 94% of the deposits into these securities that were of a hold to maturity (HTM) structure. This structure means that investors will receive payments on a fixed interest on the investment until it reaches maturity, the stage at which the initial price the bond was purchased at is returned to the investor. The time to maturity for the bonds purchased by SBV were mainly around 10 years, meaning that they are unable to withdraw the money put into these bonds for 10 years. This is where SBV’s extremely low liquidity came in, and why when customers came asking for withdrawals, the bank was unable to provide them. The following two reasons are why the customers came asking for withdrawals in the first place.
Collapse of Tech Boom and Rising Interest Rates
Whilst the two aspects listed above are separate causations for the collapse of SBV, they are closely related, and both contributed to the demand for withdrawal from consumers. Following the unbelievably good rises in the tech market during 2020/21 the boom ultimately came to a crash in 2022, seeing tech stocks fall more than 30%. On top of this, interest rates that had been next to nothing during 2020 and 2021 began to drastically rise during early 2022 in order to combat high levels of inflation that was being driven by large amounts of consumer spending following society’s escape from Covid. These two events ultimately led to many corporations around the world, including those tied with SVB needing to draw from their deposits in order to operate. This phenomenon is known as a ‘run on a bank’ whereby large numbers of depositors fearing that their bank will be unable to repay their deposits all simultaneously try to withdraw their deposits. When this run on SVB occurred, the bank was scrambling to repay depositors due to their low liquidity, and they tried to sell some of the long-term securities that they had purchased. In selling these bonds, SVB lost 1.8 billion dollars. This was announced and led to an even greater demand from depositors to withdraw. Ultimately, the bank was unable to pay back all of their depositors, and subsequently the bank collapsed.
Luckily for depositors, the US treasury decided to bail them out, and paid depositors their uninsured deposits back in full. The reasons for this included the fact that most of SBV’s clients are tech based and play an extremely important role in the US economy. The other reason was a fear that this collapse would lead to a domino effect whereby other uninsured depositors in different banks would begin to withdraw en masse.
Was the causation of this collapse more a case of corporate greed or simply a case of utter mismanagement, making a naïve decision to lower liquidity in the hopes that interest rates would stay low? Regardless, the knife that drove through the heart of SBV was a lack of foresight, and this event should open our eyes to the idea that these perceptually unstoppable institutions are not indestructible and are not warranted our unconditional faith.