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Business News/ News / World/  Explainer -Silicon Valley Bank crisis: What led to stock crash, what lies ahead?

Explainer -Silicon Valley Bank crisis: What led to stock crash, what lies ahead?

The crisis has emerged ahead of the US Fed meeting, which might hike the interest rate for the ninth time since 2022
  • Several experts have compared the current SVB crisis with Lehman Brothers and Evergrande's liquidity crisis
  • Silicon Valley Bank headquarters in Santa Clara, California, US (Bloomberg)Premium
    Silicon Valley Bank headquarters in Santa Clara, California, US (Bloomberg)

    America's Silicon Valley Bank (SVB), one of the most prolific lenders in the private market ecosystem, has been embroiled in a major crisis. SVB Financial Group bonds plunged alongside its shares after the company moved to shore up capital after losses on its securities portfolio and a slowdown in funding. Several experts have compared the current SVB crisis with Lehman Brothers and Evergrande's liquidity crisis. Moody's, which has downgraded the rating of the Silicon Valley Bank, said that rising interest rates, increased macroeconomic uncertainty, venture capital investment activity, and high cash burn among SVB's clients have created challenging conditions for the firm.

    Here's all you need to know about Silicon Valley Bank financial crisis:

    To understand what has happened with America's largest lender, it is important to look at the sound balance sheet and the growth of SVB. Silicon Valley Bank (SVB), a subsidiary of SVB Financial Group is one of the important lenders for early-stage businesses. As per the report by, the 40-year-old bank has a relationship with more than 50% of all venture-backed companies in the US. Venture or private equity funds make up approximately 56% of the bank's global banking portfolio in 2022.

    SVB balance sheet: SVB's financial profile benefits from an abundance of client funds, which includes on-balance sheet deposits and off-balance sheet client investment funds. Its average client funds were at a high at $348 billion in Q4 2022. Last year, the lender increased its Federal Home Loan bank borrowing in the second half of 2022, which resulted in a market funds/tangible banking asset ratio of 9.1% as of 31 December 2022, whereas historically this ratio was very low. The bank's net interest margin (NIM) declined to 2.0% for Q4 2022 and a 13% linked-quarter decline in net interest income.

    How did the crisis begin?

    In 2021, SVB saw a mass influx in deposits, which jumped from $61.76 billion at the end of 2019 to $189.20 billion at the end of 2021.

    As deposits grew, SVB could not grow its loan book fast enough to generate the yield it wanted to see on this capital.

    Therefore, the bank purchased a large amount (over $80 billion) in mortgage-backed securities (MBS) with these deposits for their hold-to-maturity (HTM) portfolio. Almost 97% of these MBS were 10+ years in duration, with a weighted average yield of 1.56%.

    However, with the rise in Fed rates, the value of SVB’s MBS plummeted. This is because investors can now purchase long-duration "risk-free" bonds from the Fed at a 2.5x higher yield. Precisely, with the rising US Fed interest rates, the value of existing bonds with lower payouts fell in value.

    Moody's downgrades SVB's rating: Moody’s Investors Service cut the bank’s issuer ratings following the moves. The downgrade “reflects the deterioration in the bank’s funding, liquidity and profitability, which prompted SVB to announce actions to restructure its balance sheet," Moody’s said.

    Impact on share price: 

    Silicon Valley Bank announced a share sale to shore up its finances, following a significant loss on its portfolio. Yesterday, California-based SVB Financial Group shares tumbled the most in more than 20 years after the parent company of Silicon Valley Bank took steps to bolster its financial position that includes a stock offering.

    SVB Financial plummeted 60% and continued to fall in after-hours trading after it announced that it lost $1.8 billion in sales of securities to raise funds.

    SVB announced that they had sold $21 billion of their Available For Sale (AFS) securities at a $1.8 billion loss, and were raising another $2.25 billion in equity and debt. This came as a surprise to investors, who were under the impression that SVB had enough liquidity to avoid selling their AFS portfolio. The portfolio was yielding an average 1.79% return, far below the current 10-year Treasury yield of around 3.9%.

    Venture firms advise firms to pull money from SVB

    Prominent venture capitalists have advised portfolio businesses to withdraw their money from SFB even as the bank’s top executive urged calm.

    Founders Fund, a high-profile VC firm, asked its portfolio companies to move their money, Bloomberg News reported.

    Coatue Management, Union Square Ventures, and Founder Collective also advised their portfolio companies to pull their funds from the bank.

    What is SFB saying?

    SVB Financial Group Chief Executive Officer Greg Becker held a conference call on Thursday advising clients of SVB-owned Silicon Valley Bank to “stay calm" amid concern about the bank’s financial position, according to a person familiar with the matter.

    Becker held the roughly 10-minute call with investors wherein he asked the bank’s clients, including venture capital investors, to support the bank the way it has supported its customers over the past 40 years.

    What could happen next?

    According to Debarghya Das, Founding engineer at Glean, if VCs and tech companies pull out their money from Silicon Valley Bank, then chances are that it may go bankrupt, many startups would be wiped out and recession is likely to occur.

    Kotak Mahindra Bank CEO Uday Kotak wrote, "Overnight developments in US banking: markets, analysts, investors underestimate the importance of financial stability for the balance sheet of a bank. When interest rates move up 500 bps from zero in a year, an accident was waiting to happen somewhere".

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    Updated: 10 Mar 2023, 12:52 PM IST
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