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SILICON VALLEY BANK COLLAPSE

June 17, 2024
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This eerily feels like 2008

 

WHO IS SILICON VALLEY BANK?

The name Silicon Valley is synonymous with names in some of the world's leading technology companies, startups, and venture capitalists. If you have an amazing idea, you want to be networking in Silicon Valley to get capital and or angel investors.

 

Silicon Valley Bank (SVB) is a financial institution that primarily provides banking and financing services to technology and life science companies, as well as venture capital firms, private equity firms, and other investors. The lender was ranked as the 16th biggest in the U.S. at the end of last year, with about $209 billion in assets.

 

Some of the services offered by Silicon Valley Bank include:

  1. Business banking: SVB provides checking and savings accounts, commercial loans, credit cards, and other financial services to help startups and established companies manage their finances.
  2. Financing: SVB offers various financing options, including venture debt, structured finance, and project finance, to help companies raise capital and grow their businesses.
  3. Treasury management: SVB provides cash management and payment solutions to help companies manage their cash flow and streamline their operations.
  4. Investment management: SVB offers investment management services to help clients manage their investment portfolios and optimize their returns.

 

WHAT WENT WRONG?

The wheels started to come off on Wednesday, when SVB announced it had sold a bunch of securities ($21 billion) at a loss of $1.8 billion and that it would sell $2.25 billion in new shares to prop up its balance sheet. The bank also revealed it was taking out loans to borrow $15 billion more than originally planned. That triggered a panic among key venture capital firms, who reportedly advised companies to withdraw their money from the bank.

 

The companys stock then crashed on Thursday, dragging other banks down with it. By Friday morning, SVBs shares were halted, and it had abandoned efforts to quickly raise capital or find a buyer. The bank was immediately taken over by the Federal Deposit Insurance Corporation (FDIC). The FDIC is an independent government agency created by Congress to maintain stability and public confidence in the nation's financial system.

 

When interest rates were near zero, banks loaded up on seemingly low-risk Bonds. But as the Fed raised interest rates to fight inflation, the value of those assets has fallen, leaving banks sitting on unrealized losses. Higher rates hit tech especially hard, undercutting the value of tech stocks and making it tough to raise funds. That prompted many tech firms to draw down the deposits they held at SVB to fund their operations.

 

In short,

  1. SVB borrowed money at low interest rates and passed those low rates onto clients.
  2. Interest rates then spiked really fast, meaning they have to pay more interest on the money they borrowed, BUT the interest income from clients does not rise in the same way, leaving them out of pocket and at a very fast pace.
  3. Customers panicked with all the news released this week and started pulling out their money.
  4. However, only the first $250,000 of each customers money is insured, but 89% of the bank's deposits were uninsured as of the end of 2022.
  5. Most clients have more than $250,000 and will need to wait to get their money. The FDIC plans to pay them out "as it sells the assets of SVB". Lots of startups exclusively banked with SVB, as this was a covenant of their debt.

 

SVB was incredibly integrated into the lives of many founders. Not just their startup's bank and lender, but also provided personal mortgages and other financial services. This will be quite messy to wind up and will have devastating effects for founders and employees. SVB was not just a dominant player in tech but is highly integrated in some non-traditional ways. Even if a company does not bank with SVB, their outsourced Payroll function might be with SVB, and they will be unable to pay staff.

 

SVB closure is going to have a massive impact on the tech ecosystem.

 

WHAT SHOULD INVESTORS DO?

Other bank stocks fell Thursday as Silicon Valley Bank shares swooned. Banks lost a total of about $100 billion in market value over the last two days, according to Reuters.

 

The tech sector will feel this over the next few weeks, but the best thing to do is not to panic and make long-term decisions based off unfolding events. This might be a good time to re-evaluate the diversification of your portfolio. Are you heavily concentrated in tech and financial services? If not, stick to your plan.

 

This is an unfolding event. Information can change as more details come to light. Stay safe investors.


 


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