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A customer is escorted into the Silicon Valley Bank headquarters in Santa Clara, California, on March 13, 2023.

REUTERS/Brittany Hosea-Small

SVB collapse: What happened and why it matters

Wondering about all the fuss over the collapse of Silicon Valley Bank? To get a handle on what happened and why it matters, we talked to Celeste Tambaro, managing director of Eurasia Group’s financial institutions practice. This interview has been edited for length and clarity.

GZERO: How did SVB get into trouble?

Celeste Tambaro: Although SVB was not a widely recognized name among US banks up until last week, the bank has been around for about 40 years and has built an important niche servicing investors and entrepreneurs in the emerging technology space. As you can imagine, given SVB’s positioning in the market, it experienced significant growth during the investment boom in private technology companies that occurred in the wake of the pandemic. This investment surge was fueled, in part, by continued low-interest rates and easy financial conditions during the late-2020/early-2021 period that made capital cheap and left the VC-funded start-up world flush with cash. This cash flowed into SVB in the form of deposits, or in banker’s terms, its funding base, which reached nearly $190 billion at its height. As a result, the bank was left with a lot of excess liquidity earning very low yields. In an effort to earn higher returns on this liquidity, SVB invested in a portfolio of around $120 billion longer duration U.S. Treasury bonds and fixed-rate mortgage securities. Ultimately, SVB was sitting on a highly concentrated bet on tech start-ups and a portfolio that was vulnerable if interest rates rose quickly.

And we all know what happened next. Russia invaded Ukraine, hyper-charging pandemic-driven global inflation, leading the Fed and Central Banks around the world to hike rates fairly aggressively in order to get ahead of the inflation curve. As a result, financial conditions have tightened, capital has become more expensive, and the growth outlook has become cloudier. This environment has weighed on investor sentiment in the tech space, so cash has not been flowing as freely in the start-up community, nor into SVB as new deposits. In addition to the negative impact that rising rates had on SVB’s deposit base, they also led to a decline in the value of SVB’s longer-duration portfolio as bond prices fell.

As deposit withdrawals picked up pace in February and early March, SVB’s management decided to shore up its liquidity and sell down $21 billion of its longer-dated securities portfolio. The problem was that any sale would be at a loss given the sharp move in interest rates. The sale took place and then things got worse. On Wednesday, management reported a realized loss of $1.8 billion on the sale – it was also attempting to raise an additional $2.25 billion of capital to bolster its balance sheet. But time was not on the bank’s side. SVB was quickly losing the confidence of the bond rating agencies, the market, and its key customers, and last Thursday the capital raise fell through. High-profile VC investors were sounding the alarm on the health of the bank, and liquidity concerns quickly shift to concerns that the SVB was insolvent. By Friday morning, a final frenzy to withdraw deposits, a so-called run-on-the-bank, occurred. Last-ditch attempts to sell the bank fell through, and by Friday afternoon SVB as we knew it was gone. That old familiar lesson yet again: Banks can go to zero if not run properly and the market and customers lose confidence.

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