"The demise of Silicon Valley Bank (SVB) was not caused by credit problems, but by an old-fashioned asset/liability mismatch that was the undoing of many savings banks in the 1970s," said Roland Rupprechter, MBA (WU Vienna), Managing Director of R&B Vermögensmanagement Gesellschaft in Dornbirn, in today's press release.

The Californian supervisory authorities seized SVB on 10 March 2023 after a run on deposits. It was the largest bank failure since Washington Mutual in 2008.

SVB, which catered to tech start-ups and venture capitalists, saw a huge influx of deposits from 2020 to early 2022. Deposits totalled 198 billion dollars on 31 March 2022, compared to 74 billion dollars in June 2020.

In order to generate a return from this enormous inflow of deposits, the SVB decided to invest the majority of the funds in mortgage-backed government bonds. These have a minimal credit risk, but - like all bonds - have a low to considerable interest rate risk depending on the term.

The SVB's big mistake was to invest the new funds predominantly in long-term mortgage-backed securities with maturities of more than 10 years in order to maximise benefits. Bonds with short and medium maturities, on the other hand, were hardly taken up.

As a result, the Markowitz portfolio theory "Don't put all your eggs in one basket" was not taken into account and the golden bank rule, which states that banks should only use their financing funds in such a way that the maturities match the terms of the funds invested, was broken. The result was a massive mismatch between assets and liabilities.

The sharp rise in interest rates and the slump in the bond market in 2022 (bond prices move in line with yields) had a significant negative impact on the SVB's bond portfolio. At the end of 2022, the SVB held securities worth USD 117 bn, which accounted for over 50% of its assets totalling USD 211 bn.

The (book) loss of USD 15 billion contrasted with equity of USD 16 billion.

The problem was exacerbated by the SVB's reliance on institutional deposits, with the majority of its deposit base consisting of accounts in excess of USD 250,000. This made it highly vulnerable to a run on deposits.

When the bank unexpectedly announced a need for capital at the beginning of March, customers panicked and a bank run began. Within hours, over USD 40 billion flowed out on 9 March. This forced the US deposit insurer FDIC to close the SVB on 10 March.

Effects are manageable

Due to its specialisation in start-up financing, the bankruptcy does not pose the same risk as the Lehman bankruptcy in 2008. Lehman was much more internationally networked across various sectors and also had credit lines and business relationships with all European banks. SVB, on the other hand, was "locally operational", the only international integration was with SVB's British subsidiary, which had already been taken over by the major British bank HSBC.

Start-ups in Silicon Valley are particularly affected by the SVB collapse. The bank is very important there, as many start-ups have their bank accounts and current accounts with SVB. There is now good news for these customers: access to their deposits and savings has been restored since 13 March.

"What's next for SBC?"

The banking regulator FDIC, which took control of the SVB on 10 March, had to cancel the first planned auction of the parts of the company because there were not enough interested parties. However, the FDIC has announced that there will be a second attempt. At this auction, offers could be made to potential buyers to sweeten the deal. For example, a loss assumption agreement is conceivable.

In addition, several venture capital firms are currently working on a "long-term plan" to retain parts of SVB so that they can continue to serve their customers in the technology sector. A group of several firms has been in talks since the second week of March about how SVB could continue to lend to companies and executives in the sector, reports the Financial Times. One of the proposals being discussed is the formation of a consortium with Apollo, which could bid for parts of SVB. Other investors are apparently also interested in parts of the bank.