FDIC will fully protect all depositors in Silicon Valley Bank. Secretary of Treasury Janel Yello, Federal Reserve Board Chair Jerome Powell and FDIC Chairman Martin Gruenberg released a joint statement in support of Silicon Valley Bank customers on March 12, 2023. https://home.treasury.gov/news/press-releases/jy1337 They made the move to restore confidence in the banking system and avoid a panic bank run. The Federal Reserve Board also announced they will provide liquidity to any bank so depositors can have access to their funds. Silicon Valley Bank shareholders, unsecured deb holders are not protected and senior management there has been removed according to the press release.
40 year old Silicon Valley Bank closed March 10, 2022. Visitor to its web site is now greeted with the following message:
“On Friday, March 10, 2023, Silicon Valley Bank, Santa Clara, CA was closed by the California Department of Financial Protection & Innovation. Subsequently, the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed.
To protect the depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB) to allow depositors access to their insured deposits and time to open accounts at other insured institutions. “
Silicon Valley Bank’s parent company is SVB Financial Group. Its investors relations web site still works. https://ir.svb.com/home/default.aspx
SVB Financial Group has 4 groups: Silicon Valley Bank, SVB Private, SVB Capital, SVB Securities.
In its Q1 Strategic update shareholder letter and slides March 8, 2023, it reported it had sold almost all its “Available for Sale (AFS)” securities and wanted to raise $2.25B because its clients continue to withdraw due to elevated cash burn. Its clients are starts up and they likely are no able to raise funds during this period of Fed tightening and market decline and had to use their existing cash. Slide 6 of its strategic presentation says the AFS Sale Size is $21B and had 1.79% yield and are 3.6 -year duration. The sale produced a realized estimated lost after tax of -$1.8B.
As Federal reserve raise interest rate, the value of existing bonds drop. These older bonds a pay a lower interest than the current interest rate and the price of the bonds drop to create yield equivalent to the current interest rate.
A large part of its customer base is VC backed start ups. Its latest Q1 2023 earnings slides showed:
“Nearly Half 2022 U.S. venture-backed technology and life science companies*
44% 2022 U.S. venture-backed technology and healthcare IPOs*”
The problem is these well connected VC have similar cash and financial needs. This resulted in a sustained period of outflows in 2022. According to chart in WSJ article, “Silicon Valley Bank’s Meltdown Visualized” March 11, 2023 which based its data on company quarterly filings w/ California regulators March 9, from 2019 – 2021, there was net inflow. 2019 had inflows in low single digits billion. 2020 had inflows of double digit teens of billion. 2021 had low twenty billions Q1-Q3 and then high teens billions in Q4. Q1 2022 still had an inflow of high single digit billion. Then problem shows up. Q2 had outflow of $10, and Q3 had slightly over -$10 billion outflows. Q3 moderated but still had outflow of a few billion.
Then as news hit that SV Bank need to raise money and of the lost from sale of its long term bonds, VC start telling their start ups to withdraw money. And withdraw they did. By the end of Thursday March 9, clients had withdrew $42 B! This is far in excess of what is the normal needs of its clients based on the patterns of 2022’s withdraw rate. With that amount of outflow, it made it very hard for SV Bank to raise money. This panic run is what then caused regulators to step in and take over the bank and closed it. Without this panic run, SV Bank could have raised the money to improve its balance sheet.
On Sunday March 12, Treasury Secretary Janet Yellen in an interview on CBS Face the Nation said the government will not bail out Silicon Valley Bank:
“Well let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out, and we’re certainly not looking. And the reforms that have been put in place means that we’re not going to do that again. But we are concerned about depositors and are focused on trying to meet their needs.”
The best scenario is for a bigger bank or company to acquire the company and restore operation before the market open on Monday March 13, 2023.