During the last couple years, SVB got a ton of deposits, and they didn't have matching loan demand. So they invested the money in bonds. Unfortunately they make a bet that interest rates would stay low, and bought longer duration (~10 year) bonds.
Interest rates have gone up, so the bonds they bought have lost value. They tried this week to fix that by selling part of the portfolio and raising capital, but did it in a ham-handed way and triggered a bank run.
I think an important backdrop here is the initial catalyst for this (to my understanding) was a decline in VC funding and elevated cash burn in their clients, leading to a net outflow of deposits, which is ultimately what necessitated selling securities in the first place.
When the economy is generally healthy and your clients are diversified, deposits remain fairly stable. If this had happened, SVB likely would not have needed to sell the low-yield mortgage backed securities to cover liquidity. SVB is very exposed to the venture community and very impacted by the changing climate.
I'm a bit confused. (Haven't followed in detail) Did they not mark to market the bonds they bought and ended up insolvent in reality but not in their books? Shouldn't the regulators have pulled the trigger earlier, then? Or is this just a liquidity issue and the bank is solvent, but the assets need to be sold?
Interesting, thanks. What with the bad bet being some fairly boring bonds... that should mean their investment didn't, say, lose 90% of its value or something. Just that the 10% (or whatever it was) it dropped was enough to put them over the edge. But if they sell off those bonds that's still a fair amount of money that can be recovered... right?
Its worth pointing out that bonds are just debt instruments and that their recoverable value responds to changes in the economic environment in pretty much the same way as direct loans with similar term would.
That's some terrible risk management. I can't believe they thought Fed' action during the covid crisis wouldn't cause inflation and prompt them to increase interest rates.
They made some bad-in-hindsight bets on low-interest, medium-duration debt, rates went up 4%+, and also startups have less cash in this environment, so they were obligated to realize losses on the debt to pay withdrawals. The end result being they were undercapitalized or at least not well-capitalized. They attempted to raise funds by selling equity but this incited a run on the bank.
