The recent news about the insolvency of Silicon Valley Bank (SVB) has sparked concerns and questions among investors and individuals alike. As one of the largest banks in the country, catering to tech and life sciences startups, SVB’s fall has sent shockwaves through the industry.
What is SVB?
SVB, founded in 1985, is the country’s 16th largest bank and one of the most popular financial institutions among tech and life sciences startups, doing business with nearly half of all U.S. venture capital-backed startups.
What happened to SVB?
These events can be confusing and complicated. If you bump into anyone over the next few weeks and this becomes a topic, here’s a guide to help them understand.
Explaining it to a First Grader:
A group of people were playing Jenga and slowly stacked blocks, three by three, until a tower was built. It turned out some of the blocks had flaws. When the other players found out, they got nervous and started to pull out the blocks quicker and quicker until the Jenga tower fell over. When the blocks fell, then people got worried the falling blocks might break something else.
Explaining it to a Sixth Grader:
A group of bankers built a bank over many years for tech companies to use. The bankers took some of the money deposited at the bank and invested it. Those turned out to be bad investments and lost money. The bankers told some people about it. Then those people told other people who told other people. The people freaked out and took their money out of the bank all at once. The bank ran out of money. Not everyone got their money back.
Explaining it to a Banking Newbie:
SVB was built over a period of 30+ years. It catered to tech companies. The bank had plenty of money (deposits) available to them. They had so much money that they decided to invest some of it in Collateralized Mortgage Obligation (CMO) bonds a few years ago. As interest rates have gone up over the last year, the value of those bonds have declined in value (keep in mind, if held to maturity, the bank would get all of its money back). Since the bank caters to start-ups and tech companies, those companies have been drawing more and more money out of the bank over the last year due to the economic environment. This forced the bank to sell those bonds early at a $1.8 billion loss to cover the money leaving the bank. Word got out. And to fuel the flames, Venture Capitalists started instructing their start-up companies doing business at SVB to pull their funds and move to another bank. Within 48 hours $42 billion was pulled. When the bank realized they were in trouble, they tried to raise money from investors, but that failed. Then they tried to sell the bank, but that failed. The bank was ultimately seized by the U.S. Government.
Traditionally, consumers and businesses that left their money at SVB would be covered by FDIC insurance as long as their account balance was less than $250,000. However, Sunday afternoon the Federal Reserve, Treasury Department, and the Federal Deposit Insurance Corp jointly announced guaranteeing all deposits of SVB. Their plan includes creating a “Bank Term Funding Program,” which will offer loans of up to one year to banks that pledge U.S. Treasury securities, mortgage-backed securities and other collateral.
There is still some concern to what is often termed as “contagion” or in other words, what domino effect could occur. This remains to be seen, but given that this was a commercial bank, not an investment bank, the contagion should be limited in scope – especially with the Federal Reserve stepping in. Since SVB catered to tech start-ups, many of those companies have little to no cash flow and could struggle with meeting payroll in the weeks ahead. If they can’t pay their people or the bills, those companies will shut down or be sold (potentially at a loss).
Investing in a well-diversified portfolio can help insulate yourself from unexpected market events like the Silicon Valley Bank insolvency. Schedule your free 10-minute guidance call to learn more about building a diversified portfolio tailored to your unique investment goals.