Silicon Valley Bank

Silicon Valley Bank

 

Great marketing: Name your bank after your most desired clientele, and locate your branches among them.  Turned out to be quite a success story.  So what went wrong?

Like many massive incidents, it wasn’t just one thing.  While not rising to a perfect storm, it was a confluence of factors.  This article will review some of what we know so far.

  1. Bank assets were held in long term low interest bonds.  SVB held $90 billion of its $120 billion of bonds in longer maturities.  As interest rates rose in 2022, those bonds declined in value.  Even without doing the math, it makes sense.  If new bonds pay more than your bonds for the same risk and maturity, yours will decline.  They will someday mature at par, but what if you have to sell them quickly?
  2. Mark-to-market rules don’t apply to bank assets that are not planned to be sold.  Those bonds appeared on the balance sheet at their full value, so there was no hint of trouble, at least not to the outside world.
  3. Management bonuses were not affected.  According to the Wall Street Journal, the top three officers of SVB earned a combined $18 million in salary and bonus while sitting on what the Journal referred to as a powder keg.
  4. SVB stopped using interest rate swaps.  While we can’t guess exactly how effective the swaps would have been in hedging interest rate risk, we can say that not using them wasn’t a great strategy.
  5. They were compliant with regulations.  Assets that are not exposed to market-to-market rules tend not to be red flags to risk metrics or regulators.
  6. Unusually high percentage of non-insured deposits.  Every bank has some accounts bigger than the $250,000 FDIC limit.  However, given the nature of SVB clients, many of whom just raised millions of venture money, these deposits swarmed the insured group.  According to S&P Global Market Intelligence, SVB had 93.8% of its deposits in the uninsured category.  Depending on whom you compare to SVB, the average is closer to half that amount.  Small regional banks generally have even lower percentages.
  7. SVB sold undervalued assets at a loss instead of borrowing from the Federal Reserve.  It isn’t clear whether this oversight is the bank’s error or the Fed’s, but the borrowing window was open and didn’t get used.
  8. Depositors had other options but didn’t always use them.  While it’s hard to picture a company dividing $20 million into $250,000 tranches and sending each one to a different bank, we can expect those with a million or so to do that.  The rest could have been more careful than they were, utilizing more than one bank and/or money market mutual funds.  The latter tend to invest in very short term, highly rated, highly liquid securities.
  9. There was a run on the bank.  If you can’t remember how that works, just watch “It’s A Wonderful Life.”  Banks don’t keep all the money in the safe.  FDIC insurance is designed to avoid runs, but for all the reasons already stated, it can’t work miracles.

Notice I’m not blaming regulators, nor am I taking a position on whether we need more regulation, or whether a bail-out is justified.  These decisions are political as much as they are economic.  

Nevertheless, if you do have a view on the bail-out, remember that it would be the depositors who would be bailed out, not the bank itself or its owners.  

So, all things considered, is your bank safe?  Are your accounts safe?  Well they surely are up to $250,000 if the bank participates in FDIC insurance.  Beyond that, they probably are, but obviously I don’t know for sure.

One thing I do know is that Pershing provides its 7.5 million+ customers with a high degree of protection through the Securities Investor Protection Corp (SIPC) and the famous Lloyds of London, as well as internal controls and processes.  See the Pershing custom page for more details.