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Business Insider

Wondering what just happened at Silicon Valley Bank?
The California bank was closed by regulators on Friday and put under the control of the Federal Deposit Insurance Corporation (FDIC). That followed a tumultuous few days, including a botched capital call and a rush of depositors withdrawing their funds.
The speed of SVB’s demise was especially striking. On Tuesday, SVB CEO Greg Becker was at an investor conference answering questions about what he does to relax. A few days later, the bank he led had collapsed.
So how did it come to this? SVB’s actions in the last week, where it surprised the market with a planned capital raise which later failed, are partly to blame. Venture capitalists imploring the founders they back to pull money from the bank certainly did not help.
HKMA monitoring SVB fallout as Hong Kong-listed firms’ exposure reaches US$217m
But the seeds of SVB’s demise were planted months ago. SVB’s position as the go-to bank in tech made it a huge beneficiary of the Silicon Valley boom through the last few years. As venture capitalists raised huge funds and then invested that money into start-ups that bank with SVB, billions in deposits flowed to SVB.
A bank might normally turn those deposits into loans to customers. But in part because of the tech boom, there wasn’t a lot of demand for loans among SVB’s tech customers.
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Instead, SVB decided to park that cash in securities. When banks do this, they have to decide whether they’re going to hold those securities for the long term, in which case they’d be considered “held-to-maturity” (HTM) assets, or have them be available to sell at any moment, in which case they would be “available for sale” (AFS) assets.
Critically, HTM assets do not have to be marked-to-market, which is to say that the value of those assets do not move up and down with interest rates or the overall market. AFS assets, in contrast, are much more volatile, as their value on the balance sheet goes up and down with the market.
The bulk of these HTM assets were in things like Treasuries and mortgage bonds. As rates went up, the value of these assets plunged. But as long as the assets were held to maturity, the paper losses did not register on SVB’s balance sheet. And over time, they would indeed mature, rolling off the balance sheet altogether.
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The tech boom faded and SVB’s start-up customers started to ask for some of their deposits back.
Eventually, SVB reached a point where it had to sell some of the securities it had invested in to have enough cash to return that money to depositors. It could not sell the HTM assets, as the losses on those would wipe out the bank’s capital entirely.
Instead, it sold US$21 billion in bonds from its AFS portfolio last week, taking a US$1.8 billion loss and seeking to raise money from investors to offset that loss. But the capital call failed, leaving a hole on SVB’s balance sheet, and the rest is history.
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Banks are in what’s sometimes called the maturity transformation business. They borrow short term (think your deposits, which you can remove at any moment), and lend long (think a 30-year mortgage). The key is to manage their liquidity in the meantime, so they have enough cash to meet their short term commitments should lots of their depositors suddenly want their money back.
In the end, it was an old-fashioned bank run that sent SVB spinning. But it was its decision to invest so much money in hold-to-maturity securities in a period of record-low rates that made it especially vulnerable.


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Silicon Valley Bank (SVB)

Why did Silicon Valley Bank fail, and what does it mean?

FILE PHOTO: SVB (Silicon Valley Bank) logo is seen through broken glass in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

Silicon Valley Bank collapses in biggest US bank failure since 2008 crisis

A worker tells people that the Silicon Valley Bank headquarters is closed in Santa Clara, California, on Friday. Photo: AFP

An SVB Financial Group chart is displayed on the floor of the New York Stock Exchange on Friday. Photo: Bloomberg

HSBC swoops in as white knight for Silicon Valley Bank, buys collapsed lender’s UK unit for £1

The offices of banking giants HSBC and Barclays are pictured at the the secondary central business district of Canary Wharf on the Isle of Dogs, east London on December 11, 2020. Photo: AFP

The Alphabeta Building, where the offices of Silicon Valley Bank UK (SVB) are based, is pictured in London on March 12, 2023. Photo: Agence France-Presse

Silicon Valley Bank’s collapse likely to boost Chinese stocks by tempering US interest rate rises, brokerage says

The collapse of Silicon Valley Bank (SVB) is likely to be a boon for Chinese stocks, says Shenwan Hongyuan Group. Photo: Bloomberg

HKMA monitoring Silicon Valley Bank fallout as Hong Kong-listed firms’ exposure reaches US$217 million

The headquarters of the Silicon Valley Bank (SVB) in Santa Clara, California, on March 10, 2023. Photo: Xinhua.

A view of Silicon Valley Bank’s representative office at Jardine House in Hong Kong’s Central district on March 13, 2023. Photo: Yulu Ao

Entrance to Silicon Valley Bank’s office at Jardine House in Hong Kong’s Central district on March 13, 2023. Photo: Yulu Ao

Tencent, Alibaba, AIA fuel Hong Kong market rally while BeiGene erases loss amid Silicon Valley Bank fallout

Chinese biotech firm BeiGene has 3.9 per cent of its cash frozen in the collapse of Silicon Valley Bank. Photo: Xiaomei Chen

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The California bank was closed by regulators on Friday and put under the control of the Federal Deposit Insurance Corporation (FDIC)
That followed a tumultuous few days, including a botched capital call and a rush of depositors withdrawing their funds


In the end, it was an old-fashioned bank run that sent SVB spinning. But it was its decision to invest so much money in hold-to-maturity securities in a period of record-low rates that made it especially vulnerable.


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