Silicon Valley Bank Blowup
In this special edition of the Green Candle Newsletter, I will update on the big macro events.
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After a little break in the blog game, I’m back.
What is Silicon Valley Bank?
SVB or Silicon Valley Bank is (or was?) a state-chartered commercial bank and was formerly the 16th largest bank in the United States. SVB is a regional bank which has branches in California and Massachusetts. Prior to the current bank run headlines, SVB became known as the bank that funds nearly half of all venture-backed tech startups. Some of the most notable companies funded by or that had money with SVB are Circle, Etsy, Roblox, Rippling, Roku, and much more.
Current Situation and why SVB Collapsed
SVB was an integral part of the blow up of many tech companies in 2020 and on, but currently is in the midst of a collapse. There are multiple reasons for the SVB collapse but many are pointing to the Fed’s rapid increase of interest rates as a large part of the collapse. Some of the other reasons include lack of diversification of companies and a classic bank run where many customers withdrew their deposits following a tweet:
SVB invested a significant amount of its holdings in U.S. treasuries and agency mortgage-backed securities. These seem like an initially “safe” investment for a bank, but the value of these holdings drops as the Fed raises interest rates. Due to the Fed raising interest rates at a historic pace, this made those long term illiquid holdings lose significant amount of value and caused SVB’s bond portfolio to drop. SVB then did not protect their liabilities with short-term investments for quick liquidations and became insolvent for months because they could not liquidate their assets without an extreme loss.
Difficult economic times also caused many tech companies to withdraw money as it was difficult to obtain more money through venture capital rounds. SVB did not have the proper amount of cash on hand in order to pay out these withdrawals because many of these deposits were tied up in long-term investments. This caused SVB to sell bonds at a significant loss which worried investors causing a massive drop in stock price and within 48 hours of disclosing sale of assets the bank collapsed.
The Bank Run
A big issue was the bank run that ensued shortly after the tweet mentioned above. SVB’s stock then plummeted by 60% after the capital raise announcement. This forced California regulators to shut down the bank and place SVB under the FDIC, which ensures depositors up to $250k of deposit insurance. In the end the Fed has said, not in exact words, but that if there are any other potential banking issues due to the Fed raising rates that deposits will likely be covered. This is a developing story and I’ll be sure to write more about it in the future!
Video edition: Macro Insights
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Have a great week everyone,
Brandon
Disclosure: The article was written by Brandon Keys, and it expresses the author's own opinions. I am not receiving compensation for it. I have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon is not a financial advisor. I encourage all readers to do further research and do your own due diligence before making any investments.