Goodbye Silicon Valley Bank.
The Forbes curse is real. Every company or entrepreneur the magazine features on its cover eventually blows up, see Adam Neumann, SBF, and Elizabeth Holmes. They named SVB the best bank in America recently. Go figure.
Silicon Valley Bank has had a killer reputation as the banking partner for the majority of venture-backed startups in the United States as well as the United Kingdom. The bank also assisted the founders and GPs with their mortgages and other personal loans.
Here's what happened. Banks take in deposits from customers but these deposits are liabilities on their balance sheet since they technically owe that money to their customers, whenever they ask for it. Most banks rely on the fact that only a certain percentage of their customers will need cash at any point in time so to make money on these deposits, banks invest in other securities. Silicon Valley Bank did what most banks do however, they didn't manage their interest rate risk sufficiently.
During the pandemic, their deposits grew massively because of all the venture money that was pouring into startups (remember those amazing days). To manage these additional deposits, the bank invested in long-dated mortgage-backed securities at a fixed rate. Now, in a zero-interest rate environment, that rate was acceptable but ever since the Fed began raising rates, SVB's holdings started losing value. To add insult to injury, companies stopped raising additional venture money and thus deposits started to fall as well.
Then their troubles started. SVB reported a loss on their holdings to the tune of $2bn and needed an injection in equity (or debt) which they couldn't find. VCs and companies began to panic (unsure who panicked first) and started a bank run. The kiss of death for any financial institution.
So why didn't the government just let SVB die and live with the consequences? Well, contagion. A large number of companies that banked with SVB or had their capital in SVB accounts were suddenly worried about making payroll or keeping the lights on. The deposits were only insured up to $250,000 per account. Imagine raising over $5m to find out that only 5% of that cash was insured. That's a huge problem.
Luckily as of Monday morning this week, the Federal Reserve Board stepped up and ensured all customers will have access to their deposits.
And breathe.
HSBC has acquired SVB's UK arm for £1
HSBC stepped up to save the day and acquired SVB's UK unit for.. £1.
'SVB’s UK unit had loans of around £5.5B and deposits of around £6.7B as of March 10, according to the HSBC statement. In 2022, SVB UK recorded a profit before tax of £88M, and its tangible equity is expected to be around £1.4B." (Bloomberg)
Well, maybe they're not just saviors but just savvy business people. I mean, if we had known the UK arm was going for £1, we would have stepped in. You know what? Make it a tenner, keep the change.
What's Brian Armstrong Thinking?
SVB's closure was followed closely by Signature Bank which serves many cryptocurrency firms. This led Brian Armstrong to come out with some solutions that he's been pondering.
What does this mean? Well, probably nothing, but it's good to note that during times of crisis, everyone has a bright idea on Twitter. No offense Mr Armstrong.
