What Happened to Silicon Valley Bank?

Michael Congdon, CEO, CCO

Silicon Valley Bank (SVB), a lender to many start-up technology companies and venture capital firms, became the largest bank to fail since the 2008 financial crisis. The bank, which provided banking services to nearly half of the US's venture capital-backed technology and life-science companies, failed due to taking on too many huge deposits and being caught by higher interest rates.

In recent years, when SVB was flush with cash from these start-ups, they took a significant portion of this cash and invested it in in long-term Treasury bonds to earn a steady return while interest rates remained low.  Recently, that decision proved to be short sighted.  When the Federal Reserve started raising interest rates to combat inflation, these lower yielding treasuries began to lose value, but until recently it was all on paper because they were still holding the bonds.

At the same time, the start-up landscape has changed as well.  Venture capital funding dwindled, leading SVB’s clients to begin withdrawing their money at a rate larger than forecasted.  To fulfill these customer requests, the bank had to realize the losses in their investment portfolio by liquidating these treasury bonds and disclose a nearly $2 billion loss.   This caused a panic among their customers and only increased the rate customers were withdrawing their funds.  Within days, the bank failed and could not meet the demand for withdrawals and the Federal Deposit Insurance Corporation (FDIC) stepped in and took over.

One of the unique aspects of Silicon Valley Bank is the size of their deposits.  Because of their unique clientele, a majority of their deposits were not covered by FDIC insurance.  An estimate in the Wall Street Journal shows almost $150 billion of the $175 billion total deposits at SVB were uninsured.¹  This caused regulators to declare SVB a systemic risk to the financial system and gave them flexibility to guarantee all uninsured deposits, restoring confidence in the overall banking system.

Overall, it is the view of the Horizon Financial Investment Policy Committee that this unfortunate bank failure is not indicative of a larger banking crisis.  There will undoubtedly be some turmoil in the equity markets for bank stocks in the near future, but we do not view the failure of Silicon Valley Bank as a broader risk to the markets as a whole.

^{1 https://www.wsj.com/articles/silicon-valley-banks-meltdown-visualized-3da2263b?mod=series_bankmeltdown}