Dear Traders and Investors,
History was written on Friday 3/10/2023 with the Silicon Valley Bank collapse thus creating the second largest bank failure in US history.
Silicon Valley Bank (SVB) is a state-chartered commercial bank that has been operating in the Bay Area for over 40 years. It was established to provide banking services to tech startups in Silicon Valley.
They also had a global footprint, with offices in Israel, the U.K., a joint venture in China, offices in Europe, and finally in Canada… not bad for a bank which was conceived over the game of poker!
SVB was unlike any other bank. Normally, when a person or entity is looking for a loan, the banking institution would request information on their company’s cash flow and the available collateral.
This is a major issue especially if you’re a company still in the infancy stage and do not have positive cash flow yet. You would need a bank who would take care of your payroll and extend to you small lines of credit.
This is where SVB stepped in as they liked to cement relationships with companies when they were economic toddlers. It built strong relationships within the venture capital community.
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Silicon Valley Bank did enjoy a wide range of local and foreign clients and entities with deposits of more than $250k. A higher amount than the ones in your typical bank, meaning the majority of the deposits were not insured by the government.
This scenario would have been the normal run of things if this setup was in the 1870 or even in the 1930’s where you have a lot of deposits and a lot of local customers. This is what differentiates SVB from other big banks. They have a more diversified client base with a more diversified funding source so it wouldn’t be as much funded by deposits.
In 2020 during the pandemic SVB deposits skyrocketed. We all know the road to hell is paved with good intentions. In SVB’s case those extra Billions were invested in Treasury Bonds with long term maturities when the rates were near zero.
It seemed like a brilliant idea at the time but when the rate hiked those long term bond prices fell cratering their investment and last Wednesday 3/8/2023 the SVB announced that it has lost 1.8billion after tax loss. The Markets reacted sharply and SVB lost 160bn USD in 24hrs. As the stocks fell, depositors rushed to remove their deposits from the bank.
SVB Financial Group (SIVB) Shares on the Stock Market (December 2022 – March 2023)
Source: Yahoo Finance
Banks only carry a part of depositors’ money in liquid which is referred to as the Fractional Reserve. This means the SVB could not give depositors their money as it was held in long term bond investment that no longer held the same value. In the end SVB could no longer fulfill its obligations towards its creditors while a bank run was underway.
Given the gravity of the situation and the risk posed to the Financial System the Federal Deposit Insurance Corporation took over the Bank’s operation to oversee that depositors get their funds by Monday 3/13/2023.
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Author: Jay Joymungul
Market Analyst at Tradeview Markets
email: jjoymingul@tvmarkets.com
