Introduction
Nearly half of venture capital-backed U.S. technology companies transacted with SVB for several years in a row. At the same time, the bank’s meteoric success has its other side, namely its rapid collapse, which occurred within 44 hours. Understanding the reasons for the bank’s failure is only possible by analyzing the financial statements and assessing the bank’s state over the last few years.
Historical Analysis
2018
One needs to start with the 2018 report, which marks the beginning of the bank’s soaring financial success. The bank’s deposits grew rapidly, from $44 billion at the beginning of 2018 to $189 billion at the end of 2021 (United States Securities and Exchange Commission). At the same time, it is essential to note that the bank must accept deposits and make loans.
2019-2020
An assessment of the company’s statements reveals some lagging performance. In 2019-2020, SVB’s loan portfolio grew only from $33 billion to $66 billion (United States Securities and Exchange Commission). At the same time, the positive dynamics remained, which significantly distinguished the bank from competitors.
2021
A comparative analysis of SVB’s performance allows one to determine the bank’s advantage. For example, according to the March 2021 report, SVB had a problem that any banker would envy – the bank’s customers had too much cash. Moreover, the bank’s total deposits rose sharply over the COVID-19 year from $62 billion to $124 billion, a 100% increase (United States Securities and Exchange Commission).
By comparison, amid cash injection into the economy, growth at other U.S. banks was much more modest. The figures were less by a quarter at JPMorgan and about 40% at First Republic Bank. This influx of money at SVB is due to U.S. venture capital firms raising $330 billion in 2021 (United States Securities and Exchange Commission). It was almost double the previous record set a year earlier.
Furthermore, the fact that the U.S. technology industry experienced another boom in 2020-2021 contributed to its success. Due to the abundance of free money resulting from the zero-interest-rate policy and the growing capitalization of tech companies, SVB Bank’s business, which serves tech startups, has tripled since 2020 (United States Securities and Exchange Commission).
2022
The bank’s quotations and the volume of deposits increased, reaching $200 billion by the beginning of 2022. It is worth noting that the bank was the undisputed leader in financing technological startups. Its capitalization grew rapidly, reaching ~$40 billion by 2022 (United States Securities and Exchange Commission). For comparison, that is about 1.3 Deutsche Bank or 10% of JPMorgan Chase. In other words, the bank was both very niche and quite large.
The chain of events that led to the bank’s failure began during the COVID-19 pandemic, the same period of unprecedented success. The evaluation of the indicators is seen in the review of discounted cash flow (Graph 1). By the end of 2022, SVB’s average deposit rate is expected to be 1.17%, compared to 0.04% at the end of 2021 (United States Securities and Exchange Commission). The industry did not physically need as much cache as the bank had built up on its balance sheet. As a result, the expected decision to buy securities was made, and this is a crucial point: the bank’s asset structure began to undergo significant changes.
2023
In just one year, through March 2023, the effective federal funds rate underwent a significant transformation. It increased more than 50-fold, from 0.08% to 4.57% (United States Securities and Exchange Commission). The rising cost of capital has reduced the risk appetite of startup investors, leading to the decline of their primary source of funding: initial public offerings.
Startups, SVB’s main clients, began withdrawing money from their deposits due to financial needs. As a result, they shrank from $189 billion at the end of 2021 to $173 billion at the end of 2022 (United States Securities and Exchange Commission). To finance the outflow of funds, the bank had to sell assets, mostly consisting of medium- and long-term U.S. Treasury bonds.
However, the price of fixed-income securities is inversely linked to the Federal Reserve interest rate. The higher the rate, the lower the prices of the securities, and vice versa. The increase in interest rates has led to a rise in the yield on government securities.
SVB’s portfolio of government bonds yielded an average yield of 1.79% with an average maturity of 3.6 years, while the current market yield on 3-year bonds exceeds 4.5% (United States Securities and Exchange Commission). SVB could sell securities from its portfolio, but at a significant discount, having incurred losses that required additional capitalization to cover. The bank tried to do this by announcing on March 8 the sale of its shares. However, such actions led to losses, and soon the company ultimately collapsed.
Conclusion
There is currently no report on the bank’s activities on the day of its collapse. However, it can be assumed that the reason for the collapse of SVB was the turmoil caused by rapidly rising interest rates. Evaluating the bank’s and its customers’ actions, it can be concluded that SVB found itself in a capital shortage. The bank was compelled to sell all available-for-sale bonds, incurring approximately $2 billion in losses.
Moreover, the stock price continued to collapse, reaching nearly 60% on the day of its decline (United States Securities and Exchange Commission). The sharp withdrawal of funds from the bank was likely to result in a negative balance sheet. An assessment of the bank’s financials and actions suggests that it failed due to fewer startups with less capital, resulting from rising interest rates. Debt investments, which became less valuable due to rising interest rates, contributed to the bank’s failure.
Reference List
DCF (2023) Discounted cash flow. In Discounted cash flow.
United States Securities and Exchange Commission. SVB Financial Group: Annual report.