Silicon Valley Bank Stock Plummets: Understanding the Crash

By | March 12, 2023 3:45 pm

Who is SVB bank?

Silicon Valley Bank is one of the oldest and largest banks in the Silicon Valley (Top 20 US bank) and if they FAIL, it will lead to financial disaster.

They work with nearly half of all US VC backed startups especially tech and healthcare startups.

 How bank functions?

Banks take deposits and lend the money to borrowers. To maintain liquidity, there is minimum requirement through CRR & SLR.

But depositors can take their money back at any time and if large number of them does on same day, then the bank can go bankrupt.

What happened to SVB bank?

Due to huge pouring of VC money, their deposits grew to $180 Billion in last few years.

They put 50% of that in US Treasuries & Mortgage Based Securities (MBS) with $91 billion Mortgage Based Securities (MBS) portfolio, far exceeding its $74 billion of total loans

Which mature typically in 10+ years (average mortgages are 30 yr). They got 1.5% interest on it, which is good when T-Bills yield 0.25%

They did poor diversification into risky assets and recently large number of depositors came to them for withdrawing money.

But the Fed hiked 475 BPS in 2022 highest since 1979 and, importantly, stopped buying MBS. The MBS market sulked and yields went to as much as 7%.

When yields go up from 1.5% to 7%, the price of the bonds fall a lot. You will still get the 1.5% yield but after 10 years. For now, your mark-to-market (MTM) loss is massive. If you want your money back now, you have to book losses.

Venture Capitalists, including Peter Thiel’s Founders Fund, Coatue Management and Union Square Ventures, instructed portfolio businesses to limit exposure and pull their cash from the bank. Other VC firms have asked portfolio companies to at least shift some of their cash away from the bank as VC were asking for money  They were forced to liquidate their treasury portfolio at a 8.5% loss yesterday equal to $1.8 billion to give back money. Investors and depositors tried to pull $42 billion from Silicon Valley Bank on Thursday

Why this happened to SVB bank?

VCs have pulled away as the macro picture worsened and consequently startups went for their bank deposits.

Legendary VC Peter Thiel has now advised companies to pull money from SVB.

This shows that higher interest rates in the economy by the FED/ RBI (India) will lead to many disasters (broken business models) such as this ♨️

Further, all US banks fallen yesterday and today whole global financial markets like Europe, Japan, India, China etc are down.

My take on Silicon Valley Bank saga – there are two parts to it – sentiment and reality.
SVB incident sours the sentiment on several distinguishable front – SVB is a unique bank in a sense that it mainly caters to tech industry and tech equity venture capitalists. It had large deposit base and a cheap credit provider to tech startup space. so the sentiment gets hurt not just on banking side but tech, startups, tech life science, venture capitalists, crypto and banking. This part likely to remain sour and will continue to sour the broad sentiment. I also expect fearmongering especially highlighting it as the 14/15/16th largest bank in US.

What Is Reality?

SVP asset book is approximately $211 billion with almost 55% exposed to securities and rest to regular credit facility meaning loan. It is being called as the 14th largest bank. It has $189 billion in deposits and deposits are concentrated to tech and VC sectors. of that deposit 39 billion secured by FDIC. Trouble is 150 billion unsecured deposits which now puts the already battered tech crypto lifescience startups into further trouble + hammers the private equity and VC firms.

Is The Risk Systemic Or The Reason Behind?

We Are Here Because Of Pure/classical Mismanagement Of Interest Rate Risk. As Svb Received Immense Surplus And Deposits To The Tune Of 90 Billion During 2021, It Invested Large Chunk In Long-term Securities. This Is Classical. While This Protected The Default Risk As It Invested In Agency Mbs And Treasury. But Going Long-term Bonds It Created A Deadly Pressure On Its Interest Margin. It Is Now Earning A Yield Of 0.3% While Deposit Rate Is 2.3%. It Goes Worse. To Manage This It Closed A Part Of Long-term Portfilo To The Tune Of 91 Billion. It Wanted To Reinvest At Higher Yield Rates Now But This Resulted In A $15 Billion Loss In Bonds Against Its Own Equity Capital Of 17.5 Billion And Its Lifetime Net Profit Of 12 Billion. So The Reason Of Fall Is Classical But Not Systemic. Saying That We Should Note That 2022 Was One Of The Worst Year For Global Bond And Hybrid Fund Managers Only Comparable To The Great Depression.

Does the fall of SVB trigger systemic risk?

Though it is being portrayed as a major bank, in reality it’s share in US banking system is 0.6%. It is 1/11th the size of JPMorgan. So, it is not a systemic risk but can become one(less likely) as loss of confidence is deadly in banking sector.

The SVB crisis unfolded in just 48 hours, following the bank’s announcement that it was planning to raise funds worth more than $2 billion to plug gaps in its balance sheet. This led to widespread panic among its clients and depositors and also triggered a massive selloff.the FDIC confirmed that SVB was closed by the California Department of Financial Protection and Innovation, and that it was appointed as the receiver. It may be noted that SVB is the first FDIC-insured bank to fail in more than two years.

The FDIC has added that it would seek to sell SVB’s assets, adding that future dividend payments may be made to uninsured depositors.

Biggest US bank to fail since 2008

The Silicon Valley Bank episode marks the second-biggest US commercial bank failure since Washington Mutual, which collapsed at the peak of the 2008 financial crisis.

Before its collapse, Washington Mutual was the largest savings and loan association bank in the US. It was also placed into receivership under the FDIC and was ultimately sold to JP Morgan Chase.

The failure of Washington Mutual, along with other major investment banks such as Lehman Brothers and Bear Stearns, led to a systemwide banking crisis, and many other small and mid-sized regional banks failed as a result.






What effect has it had on SVB?

SVB’s stock plunged 60% Thursday and its bonds posted record declines.

Goldman Sachs Maintains Buy on $SIVB, raises price target to $312 (6 days ago)

Wells Fargo Maintains Overweight on $SIVB, Raises Price Target to $350 (22 days ago)

Raymond James Maintains Outperform on $SIVB, Raises Price Target to $375 (34 days ago)

Truist Securities Maintains Buy on $SIVB, Raises Price Target to $269 (45 days ago)

Maxim Group Maintains Buy on $SIVB, Lowers Price Target to $500 (45 days ago)


Category: Daily

About Bramesh

Bramesh Bhandari has been actively trading the Indian Stock Markets since over 15+ Years. His primary strategies are his interpretations and applications of Gann And Astro Methodologies developed over the past decade.

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