The Fall of America's leading Bank from $200B to 0 in just 4 hrs
Hey Explorers,
Lets talk about
A vanished $200+Billion bank!
Usually my blogs up here are space industry centric; being a part of startup economy, I do study a lot of business case studies.
The Silicone Valley Bank had a massive total assets of $200+ Billion as of dec. and cash flows in billions. Still it vanished in just 4hr.
Lets break the scenario.
SVB was the most popular bank in tech industry, it had deposits from majority tech startups and provided them support.
Since 1983 SVB has been goto destination for startups to deposit there funds.
SVB provided debt capital to VCs to invest in startups.
Startups raise funds in millions from VCs, after cutting down every expense they still hold huge cash.
Now this remaining amount and revenue these companies generate goes to SVB as a deposit. Afterall every company needs a bank to keep there money safe.
SVB it started facing issues when it saw a mass influx in deposits, from $61.76 billion in 2019 to $189 billion in 2021.
As deposits grew, SVB could not grow its loan book fast enough to generate income.
Conventional banks uses deposits from its customers to give loans and minority in other investments.
While SVB also did the same, it additionally invested $80B from these deposits in Held-to-Maturity Securities which are long term bonds. A smart move back then.
These bonds were taken at low yield (interest rates), and they follow a pattern.
As the yield decreases the price of bonds increases.
SVB bought these bonds at a yield of 1%, but soon what they didn’t want started happening; Fed increased the yield from 1% to ~4% by March 2023. And when the yield increased the price of bonds fell.
Its parent organization, the SVB Financial Group, announced a sale of $21 billion of these securities that were a part of its portfolio, along with a sale of shares amounting to $2.25 billion to shore up its finances.
SVB had to sell these bonds at a loss of $1.8B and also they failed to raise more funds.
When this news came out of 9th March, SVB’s saw its shares falling by 60%.
A poorly worded press release by SVB spooked investors and 10,000+ startups that had money in SVB.
Now, no sooner did investors figure this out that deposits of startups they have invested in is at risk, these VCs advice startups to move there money.
So, number of companies started withdrawing there money simultaneously in a fear that they will lose there money & SVB saw its cash holding getting near to zero.
This is called a Bank Run.
Then, Federal Deposit Insurance Corporation or FDIC stepped in & took over SVB. It also declared that the SVB has failed and this lead to collapse of a bank which was ranked best by Forbes just a couple of days earlier.
Business is very unpredictable when it is at unsustainable scale.
This whole case points towards many important areas.
Businesses should not play valuations games.
Today most startups only aims to raise funds and enter the unicorn club, ignoring the fact that they can bootstrap or can turn profitable in minimum rounds.
Companies today raises millions from VCs, now when they don’t turn profitable, and VCs want an exit they ask these companies to raise next rounds which lead to new investors taking more money from banks like SVB.
Also companies must consider 2 or more banks to deposit there funds; considering a government bank additionally adds more security to there funds.
Moreover rather than depositing funds, companies can invest portion of these funds in ever-growing investments like gold; this way they will hold a asset which has a valuation increasing everyday.
Think about a situation where SVB invested the $80 Billions in gold. This could have saved them from collapsing.
Startups must not focus on moving fast and breaking things but towards building a sustainable and profitable business.
The only huge mistake SBV did was without proper prediction of future bond prices it invested a lot in it and were not able to manage the risk properly.
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