Silicon Valley Bank Collapse

[canyonwalker]

Silicon Valley Bank has collapsed. "So what?" you might think, "Isn't that just some community bank for liberal techies who care more about whether the lollipops in the lobby are cruelty free and LGBTQIA+ positive than what the interest rate is?"

First, SVB is not a community bank but a commercial bank. That means instead of offering personal checking accounts and home mortgage loans and lollipops, they do banking and loans for businesses. They've focused for their entire 40 year history on helping small Silicon Valley businesses grow big. If you're at a tech startup in Silicon Valley— or in Boston, where they have branches, too— SVB is likely one of your stakeholders.

Second, SVB is actually a fairly big bank even if few people outside the Silicon Valley tech industry have heard of it. At the end of 2022 it had over $200 billion in total assets. It was one of the 20 largest commercial banks in the US. And its failure represents the largest bank failure since 2008. ...Yes, that 2008; the year when multiple big banks failed in the sub-prime lending crisis.

SVB suffered a rapid demise that belies the old saying, "A big ship sinks slowly." SVB collapsed in under 48 hours.

A Classic Run On The Bank

What happened at SVB is a form of the classic run-on-the-bank story.

SVB announced Wednesday afternoon, after market close, that it had had to sell some of its bond holdings at a loss to pay customer withdrawals. To cover that loss the bank would issue over $1B of new stock.

Investors on Thursday were spooked by this news and sold their shares. The bank's stock, ticker symbol SIVB, closed the day down more than 85%.

Depositors were spooked by the sudden risk of failure, too. Many company CFOs moved to withdraw deposits.

Friday morning the bank's stock traded down even further in the market's opening minutes before regulators intervened to shut the bank. It's now in receivership (a form of bankruptcy control) under the Federal Deposit Insurance Corporation (FDIC).

What's My Risk?

I mentioned above that SVB is a commercial bank, not a community bank. I've never had a loan or an account there. Though if I did have an account, my money would be insured up to $250,000 per account by the FDIC. (Yay, government.)

I have worked for companies that bank at SVB. A small company I worked at for 7 years, for example, had most of its money there. Our paychecks, for example, were drawn on that bank. And the company's deposits there were likely, at times, way, way more than $250,000.

I learned in a Slack message this morning from my CEO that my present employer has accounts at SVB. ...Actually he didn't say accounts but "a relationship". It's not specified what that relationship is. The CEO assured us that there won't be problems with payroll. I am feeling alarmed and more than a bit skeptical until more detail is shared.

Update: additional insights in comments below and in a followup article I wrote Mar 13, Treasury Steps in to Prevent Further Bank Runs.

Comments

Why the Stock Price Plunge Mattered

[canyonwalker]

I noted that SIVB stock plunged 85% on Thursday. Some people might wonder why that's important as stock price movements usually don't impact company operations. Remember, buying a stock doesn't mean you're paying the company money; it means you're paying another stockholder money. In this case, though, the stock price plunge was critical.

SVB was trying to raise money to cover losses by selling new shares of stock. As the market value per share plunged, SVB's planned sale would yield less and less. Or they'd have to sell even more new shares, diluting existing shareholders worse, to raise funds. This created a vicious downward cycle. Ultimately— and within the space of just a day— their plan to sell new shares became completely untenable.

The collapse of SVB's secondary stock offering left them with no means to cover depositors' demands for withdrawals, which were spiking up as a result of fear of loss. That's the classic run-on-the-bank scenario. Regulators took over Friday morning to prevent further destructive chaos.

[canyonwalker]

Sunday morning the federal government announced that the full amount of depositors' accounts would be made available to them on Monday. I.e., the government is essentially insuring the full amount of each account rather than the standard $250,000 FDIC cap. This only applies to Silicon Valley Bank and one other bank that was taken over recently.

This makes me breathe a lot easier about the fact my employer banks at SVB. No more "Will they make payroll in 2 weeks? What about in 4 weeks?"