Silicon Valley Bank Collapse Lecture Notes

Overview

• Silicon Valley Bank (SVB): 16th largest bank in the U.S. before its collapse.
• Timeline: Collapse occurred in just a day and a half.
• Significance: Second biggest bank failure in U.S. history, affecting startups and global markets.

Background

• Founded: 1983 to serve tech companies.
• Clientele: Nearly half of U.S. venture capital-backed tech and life sciences companies relied on SVB.
• Prominent Clients: Roku, Roblox, and others.

Rise and Fall

• Dodd-Frank Act: Post-Great Recession regulation signed by President Obama to enforce stricter regulations on banks.
• Regulation Rollback: Trump administration rolled back some regulations for banks with assets less than $250 billion.
• Pandemic Impact: Deposits tripled to $189 billion by 2021, making it SVB’s most profitable year.

Investment Strategy

• Bonds and Securities: SVB invested in long-term U.S. treasuries and government-backed mortgage securities.
• Risk: Interest rates rose, causing bond prices to fall and resulting in SVB sitting on $17 billion in unrealized losses.

Collapse

• Trigger: Regulatory filing on March 8th revealed a $1.8 billion loss from selling securities to cover deposit declines.
• Market Reaction: Stock price plummeted, leading to a bank run with $42 billion in withdrawals in one day.
• Regulatory Action: FDIC seized SVB; most of the $151 billion in deposits were uninsured.

Wider Impact

• Other Bank Failures: Signature Bank failed two days after SVB, marking the third-largest bank failure in history.
• Government Response: Regulators announced coverage for all deposits over $250,000.
• President Biden’s Response: Called for strengthening banking regulations to prevent future failures.

Key Points

• High-Risk Clientele: SVB’s focus on tech made it vulnerable to sudden withdrawals.
• Regulatory Gaps: Rollback of Dodd-Frank regulations may have contributed to the collapse.
• Long-term vs. Short-term: Mismatch between SVB’s long-term investments and the short-term nature of its deposits.
• Federal Assurance: Uninsured deposits would be covered, shareholders would not be bailed out.