5 Lessons Learned From Silicon Valley Bank’s Collapse

There are too many lessons to be learned from the tech-friendly Silicon Valley Bank (SVB) collapse. However, as more specifics about the bank’s demise are revealed, more nuggets of wisdom will come to light. 

In the meantime, it’s Sunday midday as I write this. A lot of information about the timeline of events that led to SVB’s closing has been covered by various media outlets ad nauseam. It’s easily the financial story of 2023. Perhaps of the 2020s to date. 

So, I’ll do a quick recap and then get into the five lessons learned from America’s latest bank failure. 

Step 1: Moody’s, the ratings agency, contacted the bank’s holding company parent, SVB Financial Group (SIVB), to let them know it would downgrade the bank’s credit by more than one notch because of the falling value of its U.S. Treasuries portfolio. This happened on March 1, nine days before the bank was shut down. 

SVB Financial CEO Greg Becker flew to New York to meet with Moody’s to see how it could avoid a multi-notch downgrade. That weekend, it worked on a plan to sell approximately $21 billion in low-yielding bonds to reinvest the proceeds in higher-yielding Treasuries. Unfortunately, the March 8 sale generated a $1.8 billion loss.

Step 2: CEO Greg Becker put out a press release that same day that it was seeking to raise $2.25 billion in common and convertible preferred equity. A day later, Becker told SVB customers to “stay calm” on a conference call. That accelerated the run on the bank’s deposits. 

By the end of March 9, $42 billion had been withdrawn, and the bank held a negative cash balance of nearly $1 billion. Its shares fell by 60% that day. 

Step 3: On March 10, it pivoted from looking for cash to selling itself to a willing buyer. None was ready to bite, given the rapid withdrawal of customer deposits. SIVB stock was halted before Friday’s open as Nasdaq sought additional information from the company.   

Step 4: California’s Department of Financial Protection and Innovation closed the bank, appointing the Federal Deposit Insurance Corporation (FDIC) as the receiver on March 10. All of the branches and offices are scheduled to reopen tomorrow morning. Shares never opened for trading on Friday. Instead, they have been delisted and will trade over the counter.  

FDIC created the Deposit Insurance National Bank of Santa Clara to ensure an orderly wind-down. So that’s where we stand on Sunday midday. 

Here then, are five lessons learned from Silicon Valley Bank’s Collapse.

$250,000 Isn’t Nearly Enough Protection

According to Liz Hoffman’s reporting for Semafor, the percentage of deposits at Silicon Valley Bank exceeding the FDIC’s $250,000 insurance cap is 97%. Citigroup’s (C) is 85%, while JPMorgan & Chase's (JPM) is slightly lower at 68%.

In an age where the average American household net worth, according to the Federal Reserve, is nearly $750,000, the cap seems ridiculously low.

“The FDIC may end up having to waive the deposit insurance cap and make everybody whole to avoid a broader run. First Republic, Western Alliance Bank and other lenders popular in Silicon Valley are facing withdrawals and have been trying to calm investors and depositors,” Hoffman wrote.

The Federal Reserve Looks Silly

You can argue the many reasons Silicon Valley Bank went bust. However, the Federal Reserve has its fair share of the blame. 

Whalen Global Advisors Chairman Chris Whalen, who specializes in bank research, spoke about the Fed’s rapid interest rate increase and their effect on Silicon Valley Bank during a Friday guest visit on the Forward Guidance podcast. 

“Rising rates cause book value to go down, and when rates rise a lot — like we just saw with Silicon Valley Bank — then you have market risk, and that market risk has turned into credit risk, and the bank had to be taken over,” Whalen stated.

“This all goes to the feet of Jerome Powell and the members of the Federal Open Market Committee because they did this. There is nothing wrong with that bank. There was nothing wrong with Silicon Valley Bank six months ago, three months ago, and now they’re dead.”

I couldn’t agree more. 

The Fed’s single focus on killing inflation is hurting many people; if it doesn’t stop soon, there could be permanent consequences. 

Hedge Funds Are Vultures

Hoffman reports that hedge funds are fear-mongering by offering to buy SVB customer deposits at 60 to 80 cents on the dollar. 

“Firms better known for investing in distressed debt, including Oaktree, one of the people said, are fanning out to startups in the wake of the bank’s failure and seizure by the Federal Insurance Deposit Corp. on Friday. Its collapse left hundreds of startups — as well as the venture funds that backed them — unable to access their cash to meet payroll and other expenses,” Hoffman stated. 

While it’s not surprising that companies such as Oaktree are taking advantage of a bad situation to profit, the FDIC and other federal agencies are responsible for making those customers whole sooner rather than later. 

Someone Should Buy the Entire Business

As Whalen said on Forward Guidance, Silicon Valley Bank was a good bank. For the operating businesses to vanish because of a bad bet on interest rates seems arbitrary and unproductive in reigniting the American tech industry. 

If you look at Becker’s letter to stakeholders, you’ve got a business that provided venture capital, credit investments through SVB Capital; investment banking through SVB Securities; private banking and wealth management through SVB Private; and global commercial banking services through Silicon Valley Bank.  

Allowing SVB Financial to disappear into the ether could permanently affect American innovation and entrepreneurship. Someone like Warren Buffett and Bank of America (BAC) could be an ideal home for the entire business. That would be ironic, given BofA was given close to $140 billion in its 2009 rescue package from the federal government. 

All Banks Should Face the Same Regulatory Framework

Venture capitalist Howard Lindzon’s March 12 blog post highlighted a blog post about the demise of Silicon Valley Bank from Net Interest’s Marc Rubenstein. It’s a recommended read.   

Rubenstein points out that Silicon Valley Bank’s deposits more than tripled to $198 billion over the course of 27 months between the end of 2019 and Q1 2022. 

“The bank invested the bulk of these deposits in securities. It adopted a two-pronged strategy: to shelter some of its liquidity in shorter duration available-for-sale securities, while reaching for yield with a longer duration held-to-maturity book,” Rubenstein wrote. 

The problem, as we’ve now seen, is that the 1.65% to 1.75% it was getting on these massive deposits had moved much higher, resulting in held-to-maturity (HTM) losses of $15.9 billion at the end of September, $4.1 billion higher than its tangible common equity. 

Because it had so many deposits in HTM assets, the sale of any of those assets would have resulted in them being revalued lower based on prevailing interest rates. But it couldn’t because it didn’t have the capital necessary. 

However, as Rubenstein points out, it might still be around if Silicon Valley Bank had been subjected to the Liquidity Coverage Ratio (LCR) like regulators use in Europe. 

“It [LCR] requires banks to hold enough high-quality liquid assets (HQLA) – such as short-term government debt – that can be sold to fund banks during a 30-day stress scenario designed by regulators. Banks are required to hold HQLA equivalent to at least 100% of projected cash outflows during the stress scenario,” Rubenstein wrote. 

Here in the U.S., the Fed’s LCR wasn’t applied because it wasn't deemed large enough as the 16th largest bank in America. It should have been.

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