Question

What caused Silicon Valley Bank’s failure?

Sudden implosion: A loss-making bond sale followed by failed efforts to raise capital led to FDIC placing it in receivership. REUTERS

REUTERS

 

NEW YORK

EXPLAINER

SVB Financial Group Inc.’s shutdown and takeover by banking regulators on Friday can be traced to the U.S. Federal Reserve raising interest rates and souring the risk appetite of investors. Here is the sequence of events that led to SVB’s failure:

Fed raises rates

The Federal Reserve has been raising interest rates from their record-low levels since last year in its bid to fight inflation. Investors have less appetite for risk when the money available to them becomes expensive due to the higher rates. This weighed on technology start-ups — the primary clients of Silicon Valley Bank — because it made their investors more risk-averse.

Clients face cash crunch

As higher interest rates caused the market for initial public offerings to shut down for many start-ups and made private fundraising more costly, some Silicon Valley Bank clients started pulling money out to meet their liquidity needs. This culminated in Silicon Valley Bank looking for ways this week to meet its customers’ withdrawals.

Sells bonds at a loss

To fund the redemptions, Silicon Valley Bank sold on Wednesday a $21 billion bond portfolio consisting mostly of U.S. Treasuries. The portfolio was yielding it an average 1.79%, far below the current 10-year Treasury yield of about 3.9%. This forced SVB to recognise a $1.8 billion loss, which it needed to fill through a capital raise.

SVB plans stock sale

SVB announced on Thursday tit would sell $2.25 billion in common equity and preferred convertible stock to fill its funding hole. The bank’s shares ended trading on the day down 60%, as investors fretted that the deposit withdrawals may push it to raise even more capital.

Stock sales collapses

Some SVB clients pulled their money from the bank on the advice of venture capital firms such as Peter Thiel’s Future Fund, Reuters reported. This spooked investors such as General Atlantic that SVB had lined up for the stock sale, and the capital raising effort collapsed late on Thursday.

Goes into receivership

SVB scrambled on Friday to find alternative funding, including through a sale of the company.

Later in the day, however, the Federal Deposit Insurance Corporation (FDIC) announced that the lender was shut down and placed under its receivership. FDIC added it would seek to sell SVB’s assets and that future dividend payments may be made to uninsured depositors.

Answer 1

As per the report, Silicon Valley Bank's failure can be attributed to a combination of factors. The US Federal Reserve's move to raise interest rates led to a decrease in risk appetite among investors, which, in turn, affected technology start-ups - the primary clients of the bank. As higher interest rates made private fundraising more expensive, some Silicon Valley Bank clients started withdrawing money to meet their liquidity needs, which resulted in the bank looking for ways to meet their customers' withdrawals. To fund the redemptions, the bank sold a $21 billion bond portfolio consisting mostly of U.S. Treasuries, resulting in a $1.8 billion loss that it needed to fill through a capital raise. The bank announced a stock sale to fill its funding hole, but some clients pulled their money out of the bank on the advice of venture capital firms, and the capital raising effort collapsed. As a result, the bank was shut down and placed under the receivership of the Federal Deposit Insurance Corporation (FDIC).