We’ve received some calls about the collapse of Silicon Valley Bank “SVB” and rather than calling all of our clients and putting them at high alert we figured we’d write up a professional and easy to follow explanation of what happened and some clarification per our perspective. First and foremost, we as a company were not affected by this in any way as we do not bank with Silicon Valley Bank nor utilize them for any services. As a result, this does not impact your accounts directly at all either. So let’s talk about what happened. Essentially, SVB went from being a bank that had tens of billions of dollars in deposits to a bank that had several hundreds of billions in deposits. This came as a result of many of their client’s being technology companies which were receiving large investment dollars and those companies needed a bank. Silicon Valley is a well-known tech start-up region and the bank has become a popular option for tech companies. Like any bank, when they receive deposits, they use client’s money to make money by issuing loans as well as purchasing securities.
In the case of SVB they purchased long term bond securities which would cause problems later. The reason this caused a problem is because they purchased these long term bonds in a very low interest rate environment and so when interest rates started to go up substantially then those longer term bonds were taking pretty big losses. Usually this wouldn’t be a huge problem as they were long term bonds and however in the case of SVB they had to sell these bond positions at large losses in order to cover their deposits because clients started to ask for money back. These losses accumulated so much that as SVB considered what their options were it seemed issuing stock for a capital raise was their best option per Goldman Sachs advice. However when SVB announced they would be issuing stock for a capital raise the stock sank drastically as this alarmed investors and the clients of the bank became concerned by the masses and initiated a “bank run” essentially withdrawing as much as they could from the bank which would go on to cause the bank to be unable to meet its obligations, and as such collapse, which thereafter caused the government to effectively step in. The government, most notably the FDIC, Federal Deposit Insurance Corporation, decided to act decisively to protect 100% of the deposits as opposed to the maximum $250,000 that’s widely recognized. Some important factors for this decision is that 99% of the clients of SVB had deposits above $250,000 and many of these companies are the future of tomorrow’s innovation and letting them go under would have drastic consequences.
We are monitoring the banking industry actively and would like to remind you that while there are bad apples out there we don’t fear for the banking system entirely and we do observe that this bank in particular had a concentrated exposure to one particular sector, in this case, tech companies, which is a risk in and of itself.
by Richard Corral