Why bank run hit SVB, where it may lead

Several factors caused its distress, and behind most of them are Fed’s rapid interest-rate increases.

Regulators have long warned that the end of rock-bottom interest rates could cause sudden crises in unexpected corners of global finance.

So when Silicon Valley Bank (SVB) surprised the market with a funding crunch and then failed, investors wondered if its problems were a harbinger of broader trouble.

Major banks are much better capitalized than before the global financial crisis, and SVB’s deposit base was heavily concentrated in venture-backed startups.

But the sell-off in bank shares that followed SVB’s woes reflected worries that the ripple effects of interest-rate hikes could hurt at least the more vulnerable.

1. What was SVB?

SVB was deeply embedded in the U.S. startup scene, as the only publicly traded bank focused on Silicon Valley and tech startups.

According to its website, it did business with nearly half of all U.S. venture capital-backed startups and 44% of U.S. venture-backed tech and health-care companies that went public last year.

Its website lists Shopify, VC firm Andreessen Horowitz and cybersecurity firm CrowdStrike Holdings as among its clients.

2. What happened to it?

On March 8, the parent company of Santa Clara-based SVB, SVB Financial Group, announced it had sold $21 billion of securities from its portfolio at a loss of $1.8 billion and would sell $2.25 billion in new shares to shore up its finances.

All of that unnerved a number of prominent venture capitalists, including Peter Thiel’s Founders Fund, Coatue Management and Union Square Ventures, which are said to have instructed their portfolio businesses to pull their cash from the bank.

By March 10, the effort to raise new equity had been abandoned, and the bank was put into receivership by the Federal Deposit Insurance Corp.

3. What went wrong for SVB?

Several factors came together to cause its distress. Some of those are unique to SVB, and some are the source of broader worries in banking.

Behind most of them are the rapid interest-rate increases pushed through over the last year by the U.S. Federal Reserve to tame the highest inflation in decades.

One consequence of those hikes that hit SVB especially hard was the sharp downturn in the high-flying tech companies that had been the source of its rapid growth.

As venture capital dried up, those firms tapped their deposits for the cash they needed to keep going. Most banks have broader customer bases.

4. What happened because of those withdrawals?

SVB’s funding structure turbocharged an issue hitting all banks.

All U.S. lenders parked a chunk of their money in Treasuries and other bonds.

The Fed’s hikes made those existing bonds with their low yields less valuable, and the bond market saw its steepest declines in decades.

But SVB took it to a different level:

Its investment portfolio swelled to more than half of its total assets, far above the norm.

As a result, when the wave of withdrawals forced it to sell off most of those assets, it had to sell bonds that had lost a substantial portion of their value, producing that $1.8 billion in losses.

5. Why are there fears of contagion?

For one thing, SVB’s problems coincided with the abrupt shutdown of Silvergate Capital.

Those problems were mostly unrelated: At Silvergate the problem was a run on deposits that began last year, when clients — cryptocurrency ventures, primarily — withdrew cash to weather the collapse of the FTX digital-asset exchange.

But the withdrawals forced asset sales that locked in losses, as happened with SVB, leading Silvergate to announce plans to wind down operations and liquidate.

And even before SVB’s woes became public, U.S. bank stocks had come under pressure after KeyCorp warned about mounting pressure to reward savers: As interest rates rise, depositors can find new incentives to switch to banks offering higher rates. Analysts say that pressure hits regional banks hardest.

They can either raise their own rates, cutting into profits, or face the prospect of a scramble to shore up their funding base if depositors leave.

6. Did anyone see this coming?

Concern had been mounting about the impact of rising rates on bank balance sheets.

While rising rates buoy banks’ revenue, in the short term they also force them to write down the value of assets they hold.

In all, U.S. banks had booked $620 billion in unrealized losses on their available-for-sale and held-to-maturity debts at the end of last year, according to filings with the FDIC.

The agency noted in March that those paper losses “meaningfully reduced the reported equity capital of the banking industry.” As recently as January,

SVB Chief Financial Officer Daniel Beck told investors there wasn’t “any desire” for a wholesale change in the bank’s available-for-sale portfolio.

That all changed this month.

JEFF CHIU/ASSOCIATED PRESS The Federal Deposit Insurance Corp. seized the assets of Silicon Valley Bank on Friday, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis.