How Silicon Valley Bank's Missteps Shook the Market: A Cautionary Tale for Equity Investors
3 min read 21 Mar 2023, 07:01 PM ISTIn March 2020, the tech sector seemed to be one of the few bright spots in a world of uncertainty. As excess money flowed into Silicon Valley Bank (SVB), it seemed that the bank's fortunes were set to rise.
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In March 2020, the tech sector seemed to be one of the few bright spots in a world of uncertainty. As excess money flowed into Silicon Valley Bank (SVB), it seemed that the bank's fortunes were set to rise. However, as events unfolded over the next two years, it became clear that things were not as they seemed. Here's what happened, and what equity investors can learn from it.
A Long, Slow Buildup
SVB had long positioned itself as a bank for startups and high-growth companies. This focus on a niche market or pure vanilla business made it more vulnerable to Net Interest Margin (NIM) risk, as it relied heavily on deposits for its funding and income. Between 2020 and 2022, the bank's deposits grew from $74 billion to $198 billion, creating a massive pool of funds that needed to be invested to generate returns.
Investing in Long-Term Treasury Bonds: A Costly Mistake
In an effort to generate returns, SVB invested heavily in long-term treasury bonds between 2020 and 2021. This strategy seemed sound at the time, but it proved disastrous when the Federal Reserve raised interest rates in 2022. As interest rates rose, the value of the bonds held by SVB began to plummet, and the bank was left with a massive loss.
Panic Sets In: Withdrawals and Receivership
The news of SVB's booking losses and failed stock sale sent shockwaves through the market, and depositors began to withdraw their funds. In just one day, SVB saw $42 billion in deposits leave its coffers. The bank was unable to stem the tide, and it was ultimately placed under receivership on March 10th, 2023.
Lessons from the 2008 Financial Crisis
Something similar happened in 2008. Back then, the 2008 financial crisis shook the world, and US banks were hit hard. While many banks recovered by 2013, some small banks with significant exposure to subprime mortgages took longer to bounce back. In 2008, banks failed because to their exposure to riskier assets such as mortgage bonds, however in the case of SVB, they played it safe by investing in government bonds, yet still failed.
The Impact on Indian Banks and Equities
While investors may be pessimistic in the short term, the Indian economy is far stronger than it was in 2008. The RBI's regulation of the banking system has helped to mitigate the effects of the SVB crisis, but there will undoubtedly be aftershocks that could keep the equity market choppy. Investors should keep an eye on the news flow to gauge price movement.
A Cautionary Tale for Investors
The collapse of SVB is a stark reminder of the risks inherent in investing. Even seemingly strong companies can be brought down by a series of missteps and market forces beyond their control. It is important for investors to be mindful of risks and other market forces and be prepared for the worst-case scenario. With the right mindset and a cautious approach, investors can navigate even the most tumultuous markets and emerge stronger on the other side.
The Road to Recovery: What History Tells Us
For those who lived through the 2008 financial crisis, the collapse of SVB may bring back painful memories. However, history also tells us that markets can recover from even the most devastating of crises. While it may take time for SVB and other affected companies to rebound, investors should take comfort in the fact that the Indian economy is far stronger than it was in 2008. By staying vigilant and keeping a long-term perspective, equity investors can weather even the most challenging of storms. This event will also pass. No one would talk about SVB crises six months down the line as investors forgot about Evergrande issue.
Author: Sunil Damania, Chief Investment Officer, MarketsMojo
