What caused Silicon Valley Bank to collapse in only 44 hours, and how likely will the contagion spread leading to other bank failures?
Topics covered include:
- How losses on bonds blew up SVB’s balance sheet
- How is Silicon Valley Bank similar and different than other regional banks
- What the FDIC and Federal Reserve are trying do to restore confidence and stop bank runs
- How a weakening of the Frank-Dodd bank regulation act set the stage for SVB’s failure
- Why bailing out uninsured depositors is controversial
- Three scenarios of what might happen next
- Actions we can take to protect ourselves when private money fails
Show Notes
SVB’s 44-Hour Collapse Was Rooted in Treasury Bets During the Pandemic by Brian Chappatta—Bloomberg
Remarks by FDIC Chairman Martin Gruenberg at the Institute of International Bankers—FDIC
SEC Filings Details—Silicon Valley Bank
Join Statement by Treasury, Federal Reserve, and FDIC—Federal Reserve
FDIC Acts to Protect All Depositors of the former Silicon Bank, Santa Clara, California—FDIC
US regulators are setting a dangerous precedent on SVB by Sheila Bair—The Financial Times
Back-to-Back Bank Collapses Came After Deregulatory Push by David Enrich—The New York Times
Will another bank fall? by Robert Armstrong—The Financial Times
Charles Schwab shares drop 12% even as the firm defends financial position by Yun Li—CNBC
Episode Sponsors
Masterworks – invest in contemporary art
Become a Better Investor With Our Investing Checklist
Become a Better Investor With Our Investing Checklist
Master successful investing with our Checklist and get expert weekly insights to help you build your wealth with confidence.
Related Episodes
405: When Volatility Spikes, Financial Things Break
392: What Is Money and How to Use It
Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today’s episode, 424. It’s titled “Are More Bank Runs Coming? The Collapse of Silicon Valley Bank.”
How the Silicon Valley Bank Crisis Unfolded
Last Wednesday, March 8th, I saw a Financial Times piece that SVB Financial, the holding company for Silicon Valley Bank, planned to raise $2.2 billion through new stock issuance. The purpose was to replenish capital that it had lost after selling $2 billion of US Treasuries and mortgage-backed securities.
These were bonds the bank was forced to sell to meet deposit withdrawals from its customers, but also because Moody’s Investors Service was threatening to downgrade SVBs debt rating due to the large amount of unrealized losses on its bond portfolio.
Silicon Valley Bank offers a variety of banking financial products. Greg Becker, who is the CEO or was the CEO of SVB Financial, just a week earlier, at a conference in Los Angeles said, “We pride ourselves on being the best financial partner in the most challenging times.”
Silicon Valley Bank has always had a very close relationship with venture capitalists and startups. For example, I’m invested in some private capital fund-of-funds through my old firm.
I’ve invested in six funds over the last decade or so, and those funds in turn have invested in 150 other funds that were sponsored by venture capitalists, leveraged buyout managers, and real estate.
One-third of those underlying funds use Silicon Valley Bank for wire transfers, to handle the capital calls and distributions. And their underlying portfolio companies use Silicon Valley Bank.
SVB Financial’s Balance Sheet
If you pull up the year-end financial statements, the annual report, or 10k for SVB Financial, what you’ll see is it had $211 billion in assets, and 120 billion of those assets were investment securities. Some were listed as available for sale, and some were held to maturity securities.
Since 1993 financial companies and other companies, if a security such as a bond is going to be held until it matures, it doesn’t have to be marked to market. You don’t have to put the actual value based on the fluctuations of interest rates.
SVB has $91 billion of these held to maturity securities, but their fair value based on interest rate was $76.1 billion. So there was approaching $20 billion of unrealized losses on those bonds. The available for sale securities was $26 billion, and their cost basis was $28.6 billion dollars. So there was a $2 billion loss embedded in that.
As a Money For the Rest of Us Plus member, you are able to listen to the podcast in an ad-free format and have access to the written transcript for each week’s episode. For listeners with hearing or other impairments that would like access to transcripts please send an email to team@moneyfortherestofus.com Learn More About Plus Membership »
