Silicon Valley Bank
In an effort to prevent the default of Everything Everywhere All at Once, Federal regulators stepped in to cover depositors who held cash over the $250,000 FDIC insurance cap at Silicon Valley Bank (SVB). Regulators also shut down Signature Bank in New York City. Both banks had an atypical depositor base. SVB catered to venture capitalists and startups while Signature had a concentration of cryptocurrency company depositors.
Going into Friday, it was All Quiet on the Western Front. In fact, SVB’s social media had recently bragged about being named to Forbes’ annual ranking of America’s Best Banks for the 5th year in a row while also being named to the publication’s inaugural Financial All-Stars list.
As it became clear that SVB wasn’t going to be able to make depositors whole, high profile venture capitalists pleaded to regulators to save depositors and ultimately regulators stepped in to do just that. Funds are expected to be available this morning, especially important for companies looking to make payroll on Wednesday. Insured deposits will be available first with a special dividend for uninsured depositors coming some time this week.
Silicon Valley Bank’s management mismatched its deposits versus lending and got caught out by rising interest rates. In the end, this was a simple run on a bank where too many depositors wanted their money back at the same time. Keeping in the Oscar spirit, best picture nominees It’s a Wonderful Life and Mary Poppins both illustrated how a run can snowball.
Silicon Valley Bank was the Top Gun for movers and shakers in the VC community, but in a way it became a victim of its own success. As deposits poured in, it was unable to make loans at the same pace so it bought long-dated government bonds and mortgage-backed securities to earn as much as possible on the difference between the bond yields and what it paid out in interest to depositors. The market for these securities is deep and liquid so risk was supposedly low.
Then the Fed started raising rates.
SVB’s client base was strongly impacted by rising rates and needed cash. To pay depositors, SVB had to sell more and more of its bonds at a loss. Word got out that the assets backing deposits were underwater and The Whale(s) of Silicon Valley (high profile venture capitalists) whispered to founders that they should pull out their cash while they could. This is the Triangle of Sadness that led to the bank run. Buying bonds with cash from growth companies right into the Jaws of rate hikes was a Perfect Storm for Silicon Valley Bank.
There has been criticism of SVB’s bank practices. Supposedly, it was part bank, part country club – a signal within the Silicon Valley community that you were a player if you banked with SVB. The bank lent to startups at rates that no other bank would because they specialized in that niche. However, they also required some companies to exclusively bank with them if they wanted those loans and cachet.
We are in a quiet period for the Federal Reserve since their next meeting is March 21-22. The market expects the Fed to hike 25 bps, but it’s unlikely Fed officials will speak before the meeting to provide guidance. US CPI numbers come out tomorrow. What will be more important to the Fed: inflation or this weekend’s drama? It could be said that regulators effectively implemented a monetary easing action by now allowing banks to mark their government bond holdings to par even if their market price is at a discount. So do they remain hawkish?
If you have any questions about the safety of your cash positions, whether at Schwab or any of your local banks, please reach out to your Fairway team.