Yesterday morning, we had an inkling that the market was concerned about Silicon Valley Bank when its stock started dipping right after market open in reaction to the financial institution announcing late on Wednesday a share sale, an asset sale and an increase in its term borrowing.
This column, after summarizing SVB’s financial moves and the resulting market response, opined that those items were not “the super juicy bit” of the news, instead focusing on the bank’s note that startup burn rates were still incredibly high compared to historical norms.
Whoops. It was not clear until a few hours later that fears over the bank’s health would lead to customers withdrawing their deposits in the bank at such a scale that venture Twitter could only talk about the possibility of SVB facing a bank run.
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Today, the latest news is that SVB intends to sell itself after failing to right the ship by seeking investments.
So, what happened? How the hell did we get here? To understand, we have to rewind the clock a bit:
- The COVID-19 venture boom was partially predicated on money being incredibly cheap: Global interest rates were low to negative, so there were quite a few places to put capital to work. This led to larger venture funds, which invested a lot of their money into startups, which in turn deposited that into SVB since that was, until recently, the premier destination for startups’ banking needs.
- However, as the FT notes, the massive rise in deposits at SVB — never a bad thing at a bank — eclipsed the bank’s ability to loan capital. This meant it had a lot of money lying around.
- The bank invested all that money, at low rates, into things like U.S. Treasuries (page 6 of its mid-March update presentation).
- Later, the Fed raised rates, venture capital investment slowed, and the value of low-yield assets fell as the cost of money rose (bond yield trades inversely to price, so as rates went up, the value of SVB-held assets went down).
- Banking customers like competitive yields on deposits, so SVB was holding low-yielding assets and paying out more interest on deposits. This led to a squeeze on its net interest margin (NIM).
- The bank decided to sell its available-for-sale (AFS) portfolio at a loss (rates up, value down) so that it could reinvest that capital into higher-yielding assets. SVB wrote to investors that it was “taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their businesses.”
- What did SVB expect after all was said and done? An estimated $450 million boost to its annualized net interest income (NII).
- Initially, we thought that the bank’s shares were selling off due to investors being unhappy with the $1.8 billion charge it suffered when selling its AFS portfolio. That and the few billion in share sales that the bank also announced (coming in three different parts, but that’s immaterial for now).
- Instead, the venture and startup market grew concerned. Why was SVB selling so much stock? Taking such a huge charge? Making such drastic moves? Concern led to fear, which seemingly led to panic. Basically everyone was worried that everyone else would panic and take out their capital, so they wanted to do it first. Any risk of capital loss was unacceptable, so folks raced to not be last.
- Then this morning, as SVB stock continued to crater, news broke that the bank intends to sell itself. Commentary following the announcement indicates that the greater the outflow of deposits, the harder it will be to sell.
Why did the bank go from saying it was well capitalized yesterday to what appears to be a fire sale so soon? Our guess at this point, pending other information, is that the panic over the bank’s health led to such an outflow of deposits that it actually did get into trouble. Banking depends on trust, and suddenly SVB didn’t have the market’s.
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