Silicon Valley Bank fails: Regulators step in
Goodnight, sweet prince.
See our updated story including details on SVBUK's sale and depositor rescue here.
A crisis at Silicon Valley Bank (SVP) saw the bank shut down by regulators after a massive run on deposits.
The Federal Deposit Insurance Corporation (FDIC) has been appointed as receiver and created the Deposit Insurance National Bank of Santa Clara (DINB) to protect depositors. It has transfered all SVB assets to DINB.
All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week.
Updated Federal Reserve, FDIC, and Treasury statement of Sunday March 12 is here.
Its 17 branches will reopen on Monday, March 13, 2023.
Streaming media company Roku said it had $487 million of cash and cash equivalents in uninsured deposits at failed Silicon Valley Bank, revealing the figures in an SEC filing Friday. Thousands of others were left exposed and at the risk of being unable to meet near-term payroll and other contractual obligations.
https://twitter.com/alexmeshkin/status/1634251503019110401
The Silicon Valley Bank crisis was triggered after the announcement that SVP was issuing $2.25 billion of shares to bolster its capital position after a significant loss on its investment portfolio. (SVP this week dumped a $21 billion bond portfolio for a $1.8 billion loss; more than its entire net income in 2021, in a bid to stem losses.)
Prominent VC funds this week had urged startups to withdraw their money, triggering a run on the bank and industry fears about the broader market impact if SVP unravels, sending markets sharply downwards.
(The Stack knows of numerous UK tech startups banking with Silicon Valley Bank: One grew up through a Natwest incubator, winning awards along the way, but was then rejected for a Natwest business bank account and turned to Silicon Valley Bank when it outgrew its early stage Tide account; not an uncommon story...)
Erin Platts, CEO of SVB UK said: “SVB UKs balance sheet is segregated from the balance sheet of its parent, Silicon Valley Bank. In this sense, SVB UK, Ltd. is ring-fenced from the parent and its other subsidiaries.”
But late Friday the FT reported that the Bank of England had put SVB UK into "resolution", effectively stepping in to take over the bank, after it applied for £1.8 billion of liquidity as its parent company collapsed. The Prudential Regulation Authority (PRA), which oversees the UK entity, "believes that the London-based operation cannot be viable on a standalone basis following the takeover of SVB in the US by regulators on Friday. Officials have begun conversations with professional services firms on overseeing the resolution process" the FT said.
Silicon Valley Bank crisis: What’s happening?
“Providing loans for cash-burning startups in a bear market that can’t get funded is a bad business strategy” was one cynical if simplified take from a parody VC account – but not entirely off the mark.
S&P Global on March 9 had downgraded the bank’s credit rating to just one notch above junk.
As the company’s analysts put it crisply: “The slowdown in private capital investment has caused SVB's technology-focused depositors to burn through their cash stockpiles at an accelerating rate.
“With a large unrealized loss position in its substantial held-to-maturity securities portfolio, SVB has been funding deposit outflows with higher-cost wholesale borrowings, thereby pressuring earnings.”
Later Friday the bank’s capital raising efforts reportedly failed.
Bob Williams, CIO at Unlimited, said: “Regulators have a stake in this as well. The failure of a top-20 bank because of something as simple as deposit decay and interest rate risk puts egg all over their face.
"They need to resolve it because they didn’t catch it."
Strikingly, SVB does not appear to have had a Chief Risk Officer for much of 2022.
Laura Izurieta, former CRO, ceased serving in that role on April 29, 2022 and the bank's replacement, Kim Olson did not start until January 2023, her LinkedIn profile suggests.
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Interest rate increases have been largely good for other banks. Not SVB. As Genevieve Roch-Decter put it: “The bank is facing two huge problems: The first is interest rates. SVB positioned itself horribly just before interest rates increased. The company's $21 billion bond portfolio had a yield of 1.79% and a duration of 3.6 years.
"Compare that to today’s 3-year Treasury yield of 4.71%. As rates rose over the last year, the value of SVB’s bonds fell dramatically. And the bank had a choice: Ride out the ~3 year duration of its bonds with a yield far below the current Treasury rate, or sell at a loss and reposition the portfolio to maximize yield."
As Moody’s noted on Wednesday as it also downgraded the bank: “Rising interest rates and increased macroeconomic uncertainty coupled with declining venture capital investment activity and high cash burn among SVB's clients have created challenging conditions for the firm… Moody's does not expect the environment will recover enough for SVB to materially improve its profitability, funding and liquidity” with the ratings agency adding that “higher valuation losses on its non-marketable investments, including warrants and fund of funds, and higher provision and noninterest expense, drove SVB's reported net income 15% lower for 2022. In contrast, most of SVB's US regional bank peers' profitability is rising with higher interest rates”.
Over 3,000 UK startups bank with SVP and the repercussions and impact of its failure will reverberate extensively across the tech ecosystem in coming days, weeks and months. The Stack is going to let the dust settle over the weekend before revisiting impact in more detail early next week. If you are affected meanwhile and want to share thoughts or impact either on or off-the-record, do not hesitate to get in touch with our editor.
