Mapping The Collapse of Silicon Valley Bank: A Tale of Greed and Abject Stupidity

After the collapse of two large commercial banks, Silicon Valley Bank and Signature Bank last week, the Federal Reserve and Department of Treasury announced measures late Sunday to guarantee deposits under existing legal mandates of FDIC receivership and providing a liquid stop gap using bank assets as collateral as well as providing emergency lending authorities, and a new bank term funding program as an extension of the central bank’s discount window that will allow troubled banks to borrow against collateral at 100 cents on the dollar rather than market value.  

(Source: Noah Berger/AFP via Getty Images)

Silicon Valley Bank, an important piece of the financial plumbing of the tech world was in trouble long before last week and its collapse can only be attributed to complete managerial incompetence, and a lack of vigilance by their largest depositors venture capital firms - with 97% of deposits exceeding the maximum FDIC insurance limit of $250K, effectively resulting in a bailout of the few due to the systemic risk to the many.  

The problems at SVB began long before last week, the market at large however simply failed to notice.  SVB had significant exposure to the stressed venture world.  SVB has arguably been functionally insolvent for a year. JP Morgan analysts warned in November of last year that the bank’s $16 billion in unrealized liabilities could pose a serious risk.  In January short seller reports began appearing raising alarm to SVB’s vulnerable predicament.  The following month The Diff, a popular tech newsletter reported that SVB had a whopping 185:1 debt to asset ratio, so the question lingers, how did this borderline criminal negligence or gross incompetence come to pass?

The Numbers

At the end of 2019 SVB deposits grew from $61 billion to $189 billion by Q4 of 2021. Interest rates were so low, these deposits were like free money (~25 bps avg. cost). SVB then used these inflows to Increase loans 100% to $66 billion and go full drunk cowboy wild with its "held-to-maturity" (HTM) securities portfolio –which effectively are based on fictitious venture valuations, ramping its mostly agency mortgage holdings from $13.5 billion at Q4 '19 to $99 billion at Q4 '21.

SVB’s big problems were with its HTM portfolio. The bank increased its security portfolio by 700% buying in at a generational top in the bond market, buying $88 billion of mostly 10+ year mortgages with an average yield of just 1.63%.

SVB’s HTM securities had mark-to-market losses as of Q3 2022of $15.9 billion compared to just $11.5 billion of tangible common equity. Due to lobbying for deregulation by SVB as well other midsized banks such as SignatureBank (of which Barney Frank of Dodd Frank is now a board member), regulators did not require SVB to mark its HTM securities to market.  However, internally they should have been doing this anyway as well as running risk models against changing rates.  

On top of this, due to the Fed's interest rate hikes SVB saw accelerating deposit outflows (-6.5% YTD in January), a mix shift away from non-interest accounts, and skyrocketing interest costs (money markets now yield 4%) as well as increased burn rates from the bank’s venture clients.

As SVB’s funding costs continued to reset higher, SVB was faced with a massively high negative carry cost on its HTM portfolio, largely fixed-yield securities portfolio.

The Players

Fast forward to last week, with massively high risk in accelerating deposit outflows, the bank was forced to raise capital at which point the bank effectively announced its massive exposure to bond markets and its venture exposure to the greater market causing panic among depositors and its clients resulting in the bank’s inevitable collapse.  While the blame largely falls on the all-star management team of Lehman Brothers alumni, absent and under qualified risk managers potentially distracted by initiatives that fall secondary to a bank’s core responsibilities as well as a board of directors of which only one member had banking experience.  Even more disturbing was that SVB's CEO Greg Becker sold $3.6 million in SVB shares days before the bank disclosed large loss on February 27th less than two weeks before the start of the bank’s collapse.  Eyes should also turn to the auditors and venture capital firms that held large deposits in SVB.  

The auditor of SVB that gave the bank a clean bill of health, just 14 days before its collapse was KPMG, which according to insiders does not have an adequate understanding of banking and finance - one might be even led to believe management may have been looking for a rubber stamp.  KPMG was also the auditor of Signature Bank, and First Republic.

VCs, on the other hand, have a fiduciary responsibility to their limited partners, one would think that would entail doing some risk management themselves and paying attention to where invested funds are deposited. Alternatively, they could always take to Twitter cry foul, hide behind the deposits of their portfolio companies, and pretend that start-ups with millions in runway are the same thing as a mom-and-pop shop and thus should constitute a bailout for the sake of their IRR.


What is astounding about the SVB collapse, is that this bank was not dealing with complex derivatives, its core businesses were incredibly elementary from a banking perspective the bank's mistakes almost beg the question if there was even an ALCO in place, not that the board would have a clue of what that even is.  However, it’s the same story of the last financial crisis, greed fueled stupidity, bad risk management, bad corporate governance, and regulators not attuned to the scale of the systemic risks beyond money center banks.

Source: Brookfield Brief, Wall Street Journal, Raging Capital