On Friday March 10, 2013, SVB (the 10th largest US bank with $210bln in assets as of December 31, 2022) was shut down by regulators due to insolvency. SVB was the largest US bank failure since the Global Financial Crisis and the second largest in US history. The bank failed due to a stunningly swift run on the bank (depositors rapidly withdrawing money) driven by a confluence of underlying risk management issues described in the appendix to this memo. But, in brief, the bank had a classic mismatch in its assets and liabilities.

As of December 31, 2022, the bank had $210bln in assets and $177bln in deposits. However, the assets were heavily weighted to safe, but longer-duration securities (government bonds) subject to price declines with rising interest rates. At the same time, most of these deposits were from commercial banking customers including a significant amount of Silicon Valley start-ups and high-growth technology and healthcare companies. 93% of SVB’s deposits were uninsured (over $250,000 and not eligible for FDIC insurance). 

As venture capital firms began instructing portfolio companies to withdraw funds, this led to a panic spiral where over $42bln was withdrawn on Thursday alone. SVB simply did not have cash to meet further withdrawal needs without liquidating and realizing the losses on its securities portfolio, and regulators swiftly stepped in and closed the bank. Bank stocks were hit hard on Thursday and Friday, especially those perceived as having business models similar to SVB.

Heading into the weekend, the situation was highly unclear with the FDIC stating on Friday that insured depositors would receive access to their money in full by Monday March 13 but that uninsured depositors would receive “an unspecified advance dividend on Monday” followed by potential future dividends based upon proceeds received upon sales of SVB’s assets. Substantial uncertainty remained with regards to final amounts of these dividends (would depositors get all their money back?) and to the timing of these dividends (many start-ups and founder-backed companies had payroll obligations to meet by March 16 and may have had to furlough employees if their access to cash was constrained much longer). Finally, the potential for contagion to affect the broader financial system was high as depositors could panic further and withdraw deposits from smaller banks in mass (especially those having a larger percentage of commercial clients). The fallout from the SVB collapse also extended beyond just depositors. Many venture capital and private equity firms either had direct banking and operational relationships with SVB (with fund cash held or lines of credit at SVB) or had indirect exposure (portfolio companies holding cash at SVB). Recognizing the broader threat to an important subsystem of the economy, the Treasury, Federal Reserve, and FDIC acted swiftly to address the situation. On Sunday March 12, they announced the following: a) that all SVB depositors will have access to their money by Monday March 13, b) the closure of Signature Bank (another lender with similarities to SVB) and similar protection for its deposit holders, and c) the creation of a new “Bank Term Funding Program,” backed by up to $25bln made available by the Treasury from the Exchange Stabilization Fund, that will offer loans to banks with terms that are easier than are typically provided by the Fed. This facility will be big enough to protect uninsured deposits in the wider US banking system and was invoked under the Fed’s emergency authority, allowing for establishing a broad-based program under “unusual and exigent circumstances”. Under this program (which provides loans up to one year), collateral will be valued at par (even if the securities are worth less in the case of longer-term Treasury and Mortgage-backed securities).

The Fed and Treasury are positioning this as other than a bailout because the stockholders and bondholders of SVB and Signature Bank do not benefit and could be completely wiped out (the aim is to protect depositors). 

• This swift coordinated action, first and foremost, removes the uncertainty regarding the uninsured deposits at SVB (and now Signature).   Depositors will get their money in full by Monday March 13, which should alleviate a potential collapse in the Silicon Valley start-up and growth-oriented company ecosystem.
  
  
• The Bank Term Funding Program facility should prevent contagion from spilling over to regional banks (especially those with similarities to SVB), though we will see if the Fed needs to increase the size of the Program.
  
  
• The Government’s actions should hopefully ensure that a specific situation that may have affected a relatively narrow (but important) sector of the economy does not lead to a more widespread financial crisis with broader economic implications.

Consequences Going Forward

This is a swiftly evolving situation in which near-and-mid-term ramifications remain to be seen. The Government’s swift actions have prevented an immediate crisis (much like it did in 1998 with the Long Term Capital Management bailout). There are likely to be changes in terms of venture capital backed firms’ cash management practices (i.e. – spreading their cash holdings across more banks and potentially holding more at Tier I banks). Additionally, regulators are likely to pay closer attention to banks’ depositor profiles and their asset-liability funding (looking for any glaring mismatches between short-term liabilities vs. longer-duration assets). Banks may also pull back further from lending to venture-backed companies creating opportunities for private venture-debt funds.

In terms of the public equity markets, we expect continued volatility over the short-term. On the one hand, investors are likely jarred by the swift collapse of a relatively large bank which may evoke memories of the GFC. Additionally, banks may become more cautious in terms of lending which could slow economic growth faster than anticipated (and hit corporate earnings as well). On the other hand, the Fed is highly likely to either raise interest rates by only 25bps at its next meeting (vs. the potential 50bps hike that was on the table prior to the most recent jobs report and the SVB collapse), or even pause for a period. Treasury yields are likely to decline, at least for some time, and investors may perceive that lower terminal rates will be able to control inflation (also potentially positive for the markets in the short term). The inflation picture and the efficacy of policy to address it (and in what timeframe) remains uncertain.