Silicon Valley Bank's Failure Analysis

1. SILICON VALLEY BANK’S
COLLAPSE
Financial Management Project
M.Com IFA (ACCA)
Group - I

2. C O N T E N T S
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o SVB Introduction
o How did SVB collapse?
o What was the immediate impact on global and Indian
economies?
o What was the direct impact on the global and Indian
economies?
o What actually happened after SVB collapsed - measures
taken by the government and FDIC
o Biggest Bank Failures
o What are our thoughts?

3. INTRODUCTION
Rated as the 16th largest bank in the United States until the crash, Silicon
Valley Bank (SVB) is a regional bank in the US, headquartered in Santa
Clara, California. Incorporated in 1983. It was among the early banks to set
focus on start-ups and venture capitalists. In December 2022, 56% of its
loans were to venture capital and private equities secured by its limited
partners. SVB is held by SVB Financial Group, which has operations beyond
the US across ten countries, including India.

4. o On 10th of March 2022, SVB shut down being one of the largest bank to have failed
since 2008 financial crisis and the second largest bank failures in the U.S. history.
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5. 5
HOW DID IT FAIL?
• Pandemic and Russia – Ukraine war led to inflation, which led increasing in the interest
rates by the Federal Reserve by up to 4.5%.

6. 6
o Interest rates between 2020 and 2022 were just
0.08% which meant people would borrow more
and more without many worries.
o During the years 2020 and 2022 when interest
rates were just 0.08%, SVB borrowed money
from the Fed at just 0.08% and lend it to start-
ups, VCs and PEs at lower rates as well.
o Hike of 425 basis points in just 1 year.

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o ​In 2021, global venture funding reached $681B,
leading to a sudden rush of huge cash in hands
of the bank.
o In 2021, SVB saw a mass influx in deposits,
which jumped from $61.76B at the end of 2019
to $189.20B at the end of 2021.
o To attract customers from big banks SVB paid a
high-interest rate of 2.33%.
o Challenge was to rotate these deposits to make
a minimum profit of 2.33%
o So, they invested about $91B dollars in long-
debted treasury bonds and mortgage bonds.
- Low interests but steady returns.

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o ​The catch here was that these securities were Held to Maturity Investments which had more
than 10 years to maturity which led to an asset-liability mismatch.
o The bank bought over $80B in Mortgage-backed securities with the deposits for held to
maturity portfolio, with an average yield of 1.56%.
o They had promised their depositors of 2.33% interest rates, but here the weighted average
yield was just 1.56%.
o The value of these securities fell from $91B to $76B (loss of $15B) as the US central bank kept
increasing interest rates as much as 9 times in 2022 to tame the rising inflation.
o Secondly, The Fed stopped buying these bonds after Covid, so the value of the unit of MBS
decreased.

9. o Newer and better govt bonds came into the picture which gave a yield of 5%, making the
existing bonds less valuable.
o But these losses were just paper losses.
o The Startup Winter – which means the start-up funding was drying out, and they were
finding it difficult to raise loans at a reasonable interest rate. So, they started withdrawing
their deposits from their banks.
o This is where SVB faced the crisis. Its deposits dropped by $20B in just 3 quarters.
o To fund the redemptions, SVB sold a $21B bond portfolio which was yielding an average of
1.79%, far below the current 10-year treasury yield of around 3.9%.
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• This forced SVB to recognize a
$1.8B Loss, which it need to fill
through a capital raise.
• To cover up these losses, SVB tried
to raise $2.25B from investors in
the form of equity and debt.
• This is where the panic started,
where all their clients including
VCs, instructed their portfolio
businesses to pull their cash from
the bank.

11. 11 IMMEDIATE IMPACTS
AFTER SVB COLLAPSED
o On March 10, 2023, Silicon Valley Bank (SVB) failed after a bank run, marking the second-
largest bank failure in United States history and the largest since the 2008 financial crisis.
o This led to SVB’s stock prices plunging by 60% in just 1 day. The bank had to stop trading in
its shares.
o A mass panic in the U.S. stock market and international investor community.
o FDIC, which had insured the bank, took over and $175B in customer deposits came under
their control.
o FDIC created a new bank called the National Bank of Santa Clara to protect insured
depositors of SVB.
o 89% of SVB’s $175 billion in deposits were uninsured as of the end of 2022
o There were concerns over whether small-business clients would be able to pay their staffs,
with the FDIC only protecting deposits of up to $250,000.

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o SVB failure created a panic among the depositors of other banks which led to a bank
run.
o Regulators shuttered Signature Bank on March 12 after its depositors had withdrawn
billions following the collapse of SVB.
o There were $200B worth of start ups, tech companies, investors money stuck in the
bank in their investments, loans and bonds which cannot be liquidated immediately.
The money is, theoretically safe, but since it is locked in for a long time as they are
held to maturity securities and bank ran out of money, there is an issue of liquidity in
the banks.
o The startups struggling financially cannot make payroll in the short term.
o Indian startups have over $1M stuck in SVB accounts.

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DIRECT IMPACTS AFTER
SVB FAILURE
o Roku had one of the biggest deposits in SVB of $487 Million. This was 26% of its cash and
cash equivalents. After declaring its exposure, its stock dropped by 3%.
o Roblox Corp had $150 Million of its $3 Billion in cash and securities at SVB (5%). Rocket Lab
USA deposited about $38M in cash. (7.9% exposure)
o Canadian advertising company AcuityAds is one of the biggest casualties. It held more than
90% of its cash at SVB ~ $55 Million. It is now using $4.8 Million spread across other banks
to continue operations.
o The crisis isn't contained to the US. Companies in the UK, Canada, Singapore, and many
other countries had exposure to SVB.180 UK Tech companies have sent a letter to Chancellor
Jeremy Hunt to intervene saying the "loss of deposits could set back the
ecosystem by 20 years“

14. Indian companies that had funding from SVB
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COMPANY TOTAL FUNDING ($m)
Paytm 4637
One97
Communications
2787
Paytm Mall 808
Bharat Financial
Inclusion
144
Naaptol 133
BlueStone 111

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o The crisis impacted Indian startups like cross-border SaaS firms and Y Combinator’s
portfolio firms.
o Startups with funds in SVB are finalizing ways to transfer their money elsewhere, even as US
regulators made the accounts at the now-shut bank accessible to depositors.
o Some of them opened accounts at bank branches at the international financial service
Centre in Gujarat City as such banks allow customers to open foreign currency accounts for
international transaction.
o Indian startups have over $1M stuck in SVB accounts.
o Many pharmaceutical companies have been hit. Crypto firms also had sizeable exposure,
like Circle with $3.3B and BlockFi with $227M.
o It is a sentimental issue, not a fundamental issue. So, a lot of U.S. banks are going to suffer
for a little bit.
o Restructuring will happen in the bank.

16. o SVB through its parent entity holds
investments in Bluestone, Carwale,
InMobi, and Loyalty Rewards.
o Therefore, a direct impact on the
Indian start-up and/or new economy
cannot be ruled out. Further, Y-
Combinator one of the key clients of
SVB has in turn invested in over 19
start-ups in India.
o Therefore, we cannot rule out a
second-order impact. The funding
winter, which was already catching up
in the start-up space, may intensify.
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Unrealized gains(losses) on
investment securities

17. WHAT ACTUALLY HAPPENED
AFTER SVB COLLAPSED -
MEASURES TAKEN BY THE
GOVERNMENT AND FDIC
o The Treasury announced that all depositors in SVB and Signature bank were
going to be made whole. So, even the uninsured deposits were going to be
redeemable in full.
o The regulators set up a new facility to give banks access to emergency funds.
o This is a new intervention that the treasury has not made before in one of these
bank failures.

18. o At the same time the federal reserve launched a new lending facility which would
allow banks to post good high-quality assets like treasuries in a new facility to
borrow against them at quite generous rates.
o A combination of these 2 things was supposed to try and stop contagion from
spreading across the banking system.
o The Fed said it would make additional funding available through a new Bank Term
Funding Program, which would offer loans up to one year to depository institutions,
backed by Treasuries and other assets these institutions hold.
o "The American people and American businesses can have confidence that their
bank deposits will be there when they need them,“ Joe Biden said in a statement.
o "We think the steps taken by the Fed, Treasury and FDIC will decisively break the
psychological 'doom loop' across the regional banking sector," said Karl Schamotta,
chief market strategist at Corpay in Toronto.
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19. BIGGEST BANK FAILURES
Washington Mutual
($307bn)
o On Sept. 25, 2008, the federal government seized control of Washington Mutual and placed it into
receivership of the Federal Deposit Insurance Corp. (FDIC) after account holders withdrew $16.7
billion in deposits in a nine-day stretch.
o The FDIC sold WaMu’s banking subsidiaries to JPMorgan Chase for $1.9 billion. Soon the fall of
WaMu, as well as investment banks Lehman Brothers and Bear Stearns, fueled the financial crisis.
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Signature Bank ($110bn)
o Just two days after Silicon Valley Bank entered receivership, Signature Bank was closed by the New
York State Department of Financial Services.
o As with the failure of SVB, government officials made it clear that while depositors were to be
made whole, shareholders and certain other unsecured debtholders would not be protected.

20. Indy Mac ($32bn)
o IndyMac became a major player in the banking world during the real estate boom of
the early 2000s by specializing in loans that didn’t require borrowers to produce
much in the way of income or asset verification.
o If home prices rose, that wasn’t a big deal because the bank could simply foreclose
and recoup its loan amount by reselling the house. But when real estate prices fell,
IndyMac’s losses grew.
Continental Illinois
National Bank and
Trust ($40bn)
o Continental Illinois was, at least in 1984, the largest bank failure in history at that
time. Once the seventh-largest commercial bank in the United States (as determined
by deposits), the bank was shuttered after large depositors — getting wind of
trouble concerning the financial giant — led a run on the bank, pulling $10 billion
early on in May of that year.
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21. HOW THESE FAILURES
ARE SIMILAR TO SVB’S
FAILURE
o The falls of Washington Mutual and Silicon Valley Bank differ in many ways, one of which
is that WaMu catered to lower- and middle-income customers that other banks deemed
too risky.
o A new report has found that 186 banks in the US are at risk of failure due to rising interest
rates and a high proportion of uninsured deposits.
o If half of the uninsured depositors quickly withdrew their funds from these 186 banks, even
insured depositors may face impairments as the banks would not have enough assets to
make all depositors whole. This could potentially force the FDIC to step in.

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LATEST UPDATES
o HSBC UK Bank plc, is acquired Silicon Valley Bank UK Limited (SVB UK) for £1. The
final calculation of the gain arising from the acquisition will be provided in due
course. The assets and liabilities of the parent companies of SVB UK are excluded
from the transaction.
o Credit Suisse, a 166-year-old storied Swiss lender, was teetering on the edge until
the government orchestrated a bargain sale to rival USB for almost $3.25 billion.
The deal was “one of great breadth for the stability of international finance," said
Swiss President Alain Berset as he announced it Sunday night.
o "An uncontrolled collapse of Credit Suisse would lead to incalculable consequences
for the country and the international financial system." The Federal Reserve and
Treasury Department welcomed the deal, as did the European Central Bank.
o The U.S. Federal Reserve will raise interest rates by 25 basis points on March 22
despite recent banking sector turmoil.

24. WHAT
ARE OUR THOUGHTS?
o SVB and banks of its size were exempted from a lot of regulations that
were put in place post-crisis. Coz they thought that their failure
wouldn't pose systemic risks to the financial system.
o But there was a run on banks as big as SVB quickly led to a run on
other banks. That suggests there WERE systemic risks associated with
banks of that size failing. Maybe those thresholds need
to be rethought.

25. o We've seen financial institutions in the hottest parts of the economy, so crypto, the
failure of FTX and now tech, with the failure of SVB, they come unstuck first, as the
interest rates have climbed. It's not clear about the full impact of interest rates has
rippled through the entire financial system or revealed all the institutions that might be
struggling with consequences.
o Since the 1970s interest rates were in decreasing state. We had periods when interest
rates went up. But a general downward trend with interest rates.
o Fed officials are right to worry about fighting inflation, but they also don’t want to light
the fuse of a financial crisis, which could send the U.S. into a recession.
o Making another big interest rate hike would risk exacerbating the global banking turmoil
sparked by Silicon Valley Bank’s failure.
o Consequence of interest rates is a slowdown in the economy at the same time high
inflation we have right now is also going to cause a slowdown in the economy. So there
is going to be a pain in the economy, if not immediately definitely in the future.
o Inflation crisis and a currency crisis are much worse than an economic recession.
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26. THANK YOU
o Amal James – Immediate Impacts
o Moideen Midhlaj – Introduction and Measures
taken by FDIC
o Chandana Suresh M – How did SVB fail?
o Shruti Anil Katke- Direct Impacts
o Kriti Prasad- Biggest bank failures