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From Reddit: What is the deal with Silicon Valley Bank? : r/OutOfTheLoop

From Reddit r/OutOfTheLoop

One Redditor wrote:

Answer: at an ELI5 level, Silicon Valley Bank (SVB) is a bank that focuses on providing services to startups and entrepreneurs. Many companies use it to hold funds that they receive from venture capitalists.

In 2021, the market was soaring and startups were getting tons of money. They put this money in SVB, which went from holding $61.76bn at the end of 2019 to $189.20bn at the end of 2021.

Banks normally make money by loaning out a portion of the money they hold, but SVB was getting so much money that they couldn’t loan out fast enough. So instead, they bought a bunch of long term investments, the majority of which will mature in 10+ years. If the bank held these investments to maturity they would be guaranteed a profit, but if they sold early they would have to sell at market value.

This would be okay except that when the fed started raising interest rates last year, the market value of these long term assets fell hard. Simultaneously, tech and startups also started to struggle with the rate hikes (see: all the big layoffs) and withdraw from their accounts more quickly. SVB was concerned they would be forced to sell their long term assets early in order to support these withdrawals which would mean taking a huge loss.

Yesterday SVB announced a fire sale: they sold a ton of more liquid investments in order to raise cash, protect and balance out all those long term assets, and improve financial health metrics. They sold over 21 billion worth of investments. They even took a small loss on some of these investments (1.8 billion) in order to get the cash (they planned to cover this loss by selling some of their shares on the stock market).

Investors and Venture Capitalists were shocked and concerned about why they had to do this and why they had to do it now. Some VCs told their startups to pull their money out of SVB or to keep no more than 250k in the bank (which is how much is insured by the FDIC).

This has raised concerns of starting a run on the bank. SVB is theoretically fine right now, but if all of these startups try to pull their money out they won’t be.

Edit to update with what happened this morning:
SVB is clearly not fine anymore; in fact, regulators ordered them to close this morning. It appears the bank run was very, very fast and overwhelmed them quickly. Shareholders will get nothing.

Its size makes it the second largest bank to ever fail, the first being Washington Mutual which collapsed in 2008.

Deposits insured by the FDIC will get their money back Monday morning, but as of their last filing 93% of the bank’s $161 billion deposits were uninsured. However, based on SVB’s liquidation plan, it is likely that all deposits will be returned eventually (probably next week).

Companies who banked with SVB are struggling to pay their employees today. Notably, Rippling (a company that manages payroll and HR services for other companies) has said that their payments flow through SVB, so any company that uses Rippling will probably have a delay in payment.

Are any other banks at risk? It’s hard to say. The crux of the issue is that SVB sold their “available for sale” (AFS) portfolio to provide enough buffer to avoid selling their long term investments. Their long term portfolio, called “hold to maturity” (HTM), had big unrealized losses and they really, really did not want to realize them. They aren’t the only ones; in total, as of the end of 2022, banks were holding about $620b of unrealized losses in their AFS and HTM ports.

Most larger banks have relatively smaller amounts of unrealized losses, but smaller regional banks may be at risk which is why $KRE (an ETF of regional banks) has dropped so much.

Another Reddit user wrote:

 

A bunch of people asked so I’ll try to do a simpler explanation!

1. an analogy:

Your name is SVB and you have a 250k net worth: 10k in your bank account, 40k in AAPL shares (200 shares at $200), and 200k in your retirement account.

It was kind of dumb of you to put so much into retirement when you have so little on hand, but it’s not the worst thing you could do. Your retirement sometimes drops with the market but if you don’t touch it until you retire you’ll be rich.

However, inflation hits, the market starts dropping and your bank account is running lower than you want. AAPL is now 180, but you decide to sell, take a 4k loss and move 36k into your bank account. The loss hurts but is not a big deal, but your wife is concerned about why you had to sell at all.

Your wife thinks about her friends who were married to Silvergate and FTX. You are way more careful than them and are not in the same situation, but she gets scared and leaves you and kicks you out of the house anyway. Now you’re so financially screwed that you may have to take an early withdrawal on your retirement account.


2. a simpler explantion:

Silicon Valley Bank has a day to day portfolio, an “available for sale” portfolio (AFS), and a “hold to maturity” portfolio (HTM). The AFS has to be ready sell so it’s invested but it’s always priced at market value (marked to market). The HTM is bonds that may fluctuate in market value but if held to maturity (10+ years) it will guarantee a profit.

When the fed started raising rates hard and fast last year, the market value of both the AFS and HTM portfolios fell. Simultaneously, their tech and startup heavy investors started struggling and pull from their deposits more quickly.

SVB was getting double punched and decided to sell their AFS portfolio to maintain enough liquidity to support withdrawals and protect their HTM. They took a small loss while selling the AFS (1.8 bil) but they were okay overall.

However, investors, venture capitalists and startups got spooked. Why’d they have to sell the AFS right now? SVB’s clients decided to take out their deposits asap and caused a run on the bank. SVB was financially screwed and shut down by regulators.