5 Lessons for Investors from Silicon Valley Bank’s Collapse
In Ernest Hemingway’s classic 1926 novel, The Sun Also Rises, Bill Gorton asks Mike Campbell, “How did you go bankrupt?” Campbell replies, “Two ways. Gradually, then suddenly.” That’s what happened recently with Silicon Valley Bank (SVB), and its parent SVB Financial Group. With over $200 billion in assets, it was the sixteenth-largest U.S. bank before its collapse on March 10, 2023. The 40-year old company became the second-largest U.S. bank failure, behind Washington Mutual, which had an asset base of just over $300 billion at the time of its collapse in 2008 during the Financial Crisis. What went wrong? And how could common sense investing practices have prevented SVB’s failure?
SVB primarily served startup companies and venture capital firms. This was an important niche market because companies in this early stage often don’t have access to borrowing funds. Besides getting loans, these firms deposited money at SVB. Those deposits ballooned from $60 billion in March 2020 to almost $200 billion in March 2022. The typical bank model is to take in deposits and then lend out the money at a higher rate than paid on the deposits. However, problems can arise if the is a mismatch between the bank’s assets (primarily loans as well as security investments like bonds) and liabilities (primarily deposits).
If there are way more deposits than loans, then the bank needs to look for ways to make money on the excess amounts, without taking on too much risk. Long-term Treasurys sound like a safe bet. But that can create a timing mismatch. Depositors can take out their money anytime. That means Treasurys may need to be sold. In an increasing interest rate environment, that also means selling at a loss (bond price decline when interest rates rise). That’s what happened with SVB. Between March 2022 and December 2022, depositors withdrew about $27 billion. That’s just the nature of these startups, which needed to dip-in to their stash of excess cash.
The bank then needed to sell some of its assets to pay the depositors, such as some of its long-term Treasurys. On March 8, 2023, SVB announced it had sold $21 billion…