A Note on the Silicon Valley Bank Story

March 10, 2023

As many know, a bank run caused regulators to close and takeover Silicon Valley Bank (SVB) Friday. This is the second largest bank failure in history, only smaller than Washington Mutual in 2008.
 
SVB seems to have failed for specific reasons. As the name suggests, SVB catered to tech companies and executives. The tech sector boomed pre-2022, and SVB’s deposits skyrocketed. SVB clients had little demand for loans, so SVB invested these deposits in bonds, many with long (10+ year) maturities.
 
In 2022, tech’s fortunes and SVB’s flows reversed. Tech companies could no longer raise billions from venture capital or initial public offerings (IPOs) of stock. Worse, tech companies spent down deposits. At the same time, interest rates rose, impairing the value of SVB’s bond portfolio. SVB had to sell bonds at a loss to meet outflows. This week’s disclosure of losses caused fear to spread, compelling depositors to yank their funds.
 
SVB’s bank accounts carried Federal Deposit Insurance Corporation (FDIC) insurance up to a minimum of $250,000. Insured balances will be available to clients Monday. Owners of uninsured deposits face an uncertain timeline and path to their funds.
 
There are a couple of important takeaways so far.
 
First, the risk appears to be specific to SVB and other banks with a niche tech or cryptocurrency clientele. The lesson here applies to investors as well – concentrated strategies are vulnerable to previously unthinkable swings in fortune.
 
Second, ensure that your bank account balances do not exceed the FDIC limit – $250,000 or more depending on the type of account. Regulators acted quickly here; even in a worst-case scenario FDIC-insured depositors should expect little disruption in service.
 
We are following this story closely. We will update with anything more that you should know. Please reach out if you have any questions.