SVB Financial Group (SIVB) – the parent company of the Silicon Valley Bank, collapsed literally within two days?
How come such a giant company with nearly $200 billion worth of deposits be in a mess just like that?
The answer has three facets:
- the unprecedented hike in deposits during the pandemic
- short-sighted investment policy of SIVB
- the continuous interest rate hike of Federal Reserves
SVB collapse (in a nutshell)
Key takeaways of an article from the Wall Street Journal (link below)
- SVB has many startups and venture capital firms as clients
- During the pandemic the banks total deposits increased by nearly 140 billion.
From just over $60 billion (at the end of first quarter 2020) to almost $200 billion (at the end of first quarter 2022)
- SIVB continued to invest in seemingly safest yet “long-term” assets – primarily U.S. Treasury bonds and gov. backed mortgages.
These assets have virtually no defaulting-risk, and they pay interest for many years. This is all good unless of course SVB would need to liquidate these assets prematurely.
- During the 2020 / 2021, SVB’s asset portfolio increased by nearly 100 billion.
- Due to the continuous interest-rate hikes by the Federal Reserve, value of treasury bonds and long term assets decreased in the open market. Meaning SVB could only sell them at a loss, should the need be.
- In 2022 SVB’s deposits inflow reversed and turned to outflow as its clients stopped getting funds from public offerings or fundraising.
- In the meantime unrealized losses of SVB amounted to a massive $17 billion.
- On 08/03/2023 SVB announced that it had sold a big chunk of securities – around $21 billion worth at a loss of $1.8 billion. Furthermore SVB said it was going to raise another $2.25 billion
- While the strategy would have worked (in my personal opinion), the SIVB stock price plummeted due to the share sale announcement.
So SVB had to fold it’s share-sale plans.
- Venture capital firms reportedly began advising their portfolio companies to withdraw deposits from SVB.
- On 09/03/2023 customers tried to withdraw a whopping $42 billion of deposits and SVB ran out of cash.
Read the detailed article at the Wall Street Journal
Lesson: Don’t “keep” all your eggs in the same basket
At this time and age, it’s astronomically absurd that large banks should collapse like this, literally within days. This is not the time for pointing-fingers, but seemingly the financial establishment has failed to impose necessary regulations to prevent such events.
Even with all the AIs, algorithms and modelling technologies around, a giant bank with $200 billion in deposits cannot figure a sensible asset-management strategy, that accounts for basic variables such as the interest rate. I still can’t wrap my head around it.
The point is though, it’s still not unlikely that any big bank or brokerage could fall just like a pawn on a chess board.
So my take-away from this whole thing is that “Keep your eggs divided into many baskets, rather than one big basket”.
Trade safe, diversify, not only your portfolio but also your brokerages!