This past week, one of the biggest tech-focused banks, Silicon Valley Bank (SVB), went into receivership, which means that they shut down their operations and will be returning customer deposits through the FDIC.
The primary trigger was that they experienced a bank run, a situation where depositors try to withdraw in a rush leading to insufficient capital to meet that demand. Banks are required to collect deposits and invest them into assets, mainly loans and other financial securities. During the low interest rate period, SVB bought long term (ten year) bonds, which yielded below 2%.
This was fine when interest rates were close to 0% but quickly became insufficient when rates went above 4%. As their depositors demanded higher rates, SVB needed to switch their ten year bonds to other assets with higher yields.
The problem is that there are only two ways to get out of a ten year bond: sitting on it for ten years, or selling it earlier than its maturity. And because the original yields were low, the bond prices have dropped to reflect the higher yield environment. So when SVB sold, they sold at a loss. They then raised some additional capital ($2B+) to cover that loss and keep them at par with their deposits.
However, in the process of doing that, it became apparent that much of their assets that they were sitting on effectively billions of unrealized losses, which may require more capital raises to cover.
That meant they were technically insolvent, spooking manySVB’s investors and depositors, many of whom are startups. They started to move their funds out of the bank, leading to a bank run and forcing the bank into receivership.
What happens now?
The US Treasury Department and the Federal Deposit Insurance Company (FDIC) put out a statement informing the markets that all depositors can withdraw their funds starting from today, March 13th. This news sent relief to all the worried depositors.
The biggest worry for the market right now is that a lot of companies and investors in the US tech industry might be impacted by this collapse, which might then lead to further job losses and a recession. However, with this statement from the Treasury and FDIC, this is not likely to be the case. FDIC has handled more than 500 Bank liquidations since 2001, and it seems clear that this situation is well within their ability to manage.
For our users who still have questions, our company and products have no exposure or relationship with SVB as an institution. We bank with traditional banks with long histories and longer balance sheets. Also, the assets we are heavily exposed to— value and high quality stocks, long term rental properties, consumer and corporate credit— are usually the least impacted or the slowest to be impacted in a recession. We also take great care to manage the assets, such that many of the known risks are accounted for. You can rest assured that we, as your asset managers, take our risk management duties seriously.
Some of the reasons, in our opinion, why SVB also experienced this, is overexposure to a single industry: tech made up the majority of their borrowers and majority of their deposits. This circular relationship meant that during the recent slow down in tech, their deposits would be drying up almost at the same time their borrowers’ credit would be worsening.
They also invested in locked down ten year duration assets for short term demand deposits, a duration mismatch. Since these are likely the primary reasons SVB went under, coupled with the swift action of the Treasury and FDIC, the risks of a contagion are not as high as we might worry.
As long-term net buyers of assets, we always build and invest with a mindset of being recession-ready and to be in a position to buy assets cheaply during turbulent periods. Whatever happens, Rise will always stay on top of the markets to ensure your money is managed with utmost safety and care.
Thank you for trusting Rise with your financial journey.