SVB - Some collected inputs

. Silicon Valley Bank holds $173B of deposits.(In 2021 SVB saw a mass influx in deposits, which jumped from $61.76bn at the end of 2019 to $189.20bn at the end of 2021).Deposits clients include Eary stage Technology 29 % & Technology 20 %

2. As deposits grew, SVB could not grow their loan book fast enough to generate the yield they wanted to see on this capital. As a result, they purchased a large amount (over $80bn) in mortgage backed securities (MBS) with these deposits for their hold-to-maturity (HTM) portfolio.

SVB held a cost basis of $11.54bn in MBS at end 2019, $12.56bn at end 2020, and $89.72bn at the end of 2021.97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%.

3. SVB’s deposits started to fall in late 2022 as it’s clients - predominantly Venture capital - cash balances held at the group began to run down as these firms delayed funding rounds & decided to burn cash.

4. The issue is that as Fed raised interest rates in 2022 and continued to do so through 2023, the value of SVB’s MBS plummeted.Part of the issue is that short-term rates (which the big banks use for borrowing) are now higher than longer-term rates (the benchmarks banks use for lending). That’s squeezing profitability.

5.The quantum of deposit shrinkage was very large and basically created an asset/liability mismatch.

6. Late on Wednesday, bank announced it was hoping to raise $2.25 billion via a stock sale and investments, in order to strengthen its balance sheet. To achieve that, it sold $ 21 bio worth of its available-for-sale securities at $ 1.8 bio loss .In addition, equity fund General Atlantic committed to invest $500 million in the bank.This came as a surprise to investors, who were under the impression that SVB had enough liquidity to avoid selling their AFS portfolio.

Implications :

1. SVB bet on easy money policy continuing forever and took windfall instant demand deposits and invested them in 10yr paper simply put ,they took excessive rate risk & duration risk.

2. The bank is the financial partner of nearly half of the U.S.’s venture-backed startups in the healthcare and technology space that went public last year. Those companies are working through their cash reserves at a tremendous rate right now, and ongoing higher interest rates have made many VCs hesitant to give more.

The failure of SVB could also destroy an important long-term driver of technology sector as VC-backed companies rely on SVB for loans as well .

3. Fear is part of what’s driving the panic, but CEO Greg Becker has tried to calm investors down, saying in his letter, “We are experienced at navigating market cycles and are well positioned to serve our clients through market volatility, with a high-quality, liquid balance sheet and strong capital ratios.” That didn’t ebb the concern, though.

4. This episode shows poor treasury management and the dominance of recency bias . The valid apprehension is that there could be more skeletons that might fall like this in the banking sector . The impression gathered from the markets is that Unless it's not validated, each bank is a systemic risk .

5. Between the lines, Even if SVB becomes insolvent, that doesn’t mean deposits are at risk. It should be noted that FDIC backed banks have never lost depositor funds.

6. The panic can subside if the major banks come out and say that they have managed their interest rate risk well in the cycle .