written by
Renjit Philip

Silicon Valley Bank - Quick demise of a once mighty bank

Silicon Valley Bank 2 min read , March 13, 2023

We have had several posts by banking experts on what happened with SVB.
I was reading and researching over the last few days and I picked up threads by @macroalf and, @ecommerceshares, @fabiusmercurius on Twitter, which are enlightening- these accounts are worth following.

The good folks at J.P. Morgan conducted a deep dive on SVB in Nov 2022. The highlights from the report (attached with marking by @ecommerceshares):

Extract from JP Morgan report as annotated by @ecommerceshares on Twitter

1) The report highlighted that the SV Bank had $16BN of unrealized losses in its Held to-maturity portfolio of assets, YET they were optimistic that the Bank has alternate sources of capital to weather an unforeseen situation.

2) The target share price was a whopping $375 (the stock fell to $106.4 when the trading was halted)

3) "Deposit outflows to 37% of startups could be considered less sticky,"-meaning deposits could be taken out in a hurry. Yet the SVBank did not have enough short-duration securities to manage this outflow (if it happened). That is a "timing" mismatch between assets and liabilities.

4) J.P. Morgan analysts expected the cash runway of startups (clients of SVB), to dwindle in the coming quarters and the VCs to fund these startups, thus improving the deposits at the Bank. While the reality is that VCs have been cautious, and the investments have dwindled over the last few months.

5) Their recommendation- Overweight. I hope not many investors bought into these recommendations!

The #SVB had $15BN cash/equivalents and faced a $40BN call for deposits by customers (Startups/ VCs). Part of his herd behavior was triggered by prominent VCs and investors urging their portfolio companies to extract their deposits. $40BN of deposits were called for withdrawal in a short period of 24-48 hrs. Such a "bank run" is difficult to survive for any bank, let alone one that was cash constrained!

Startups were desperately trying to get their deposits before the Bank went under.

The latest piece of news on the subject is that the Fed / FDIC/Treasury have stepped in to protect the depositors (and not the equity or the bondholders).
Probably heartening for all those big and small startups who were not able to pull their deposits from the Bank. Cash from deposits would be used to meet payroll, pay suppliers, health insurance, and so on. Silicon Valley's favorite bank had become too big to fail and the US regulators had to step in. Moral Hazard, anyone?

#siliconvalleybank #svb #bank #investments #banking

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