SVB - What & Why It Happened?

We are going to go through step by step what happened, and why it happened, to paint a clearer picture for better understanding.

Although a bank is technically an asset-holding machine, it splits its assets into cash, bonds, and securities.

After all, who doesn't want to earn more money on top of other people's money?

But when a large number of customers line up to withdraw cash, much more than what a bank has, then it will trigger a bank run.

Several forces collided to take down the banker.

First, there was the Federal Reserve, which began raising interest rates a year ago to tame inflation. The Fed moved aggressively, and higher borrowing costs sapped the momentum of tech stocks that had benefited SVB.

Higher interest rates also eroded the value of long-term bonds that SVB and other banks gobbled up during the era of ultra-low, near-zero interest rates. SVB’s $21 billion bond portfolio was yielding an average of 1.79% — the current 10-year Treasury yield is about 3.9%.

So, to allow withdrawal, SVB had to sell its bond portfolio AT A LOSS.

In two words - Sector concentration.

SVB was deeply concentrated in the tech industry.

As of December 31, 2022, 56% of its loan portfolio were loans to venture capital firms and private equity firms, secured by their limited partner commitments and used to make investments in private companies.

But when VC funding runs dry, so does the bank's liquidity. The tech selloff last year was a foreshadowing. Coupled with mark-to-market losses, the bank eventually imploded.

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