Silicon Valley Bank shutting down made a lot of headlines. So I thought it would be helpful to unpack that a bit for everyone.
Cliff notes: I think this is (for now) isolated to regional banks and not systemic (sort of).
Overall, this is collateral damage from the FED rate rising unlike any other time in human history, people looking for better yields, and having a bunch of eggs in one basket.
Rate Hikes: Silicon Valley Bank was holding a lot of bonds that at the time were considered a safe place to park some cash. They took on a ton of money when money was basically free, and rather than make loans, they decided to park their excess liquidity in US Treasuries (usually a safe bet). However, they depreciated in value as rates skyrocketed which created a liquidity problem.
One Basket: On top of that, the bank was heavily deployed in the tech space, which has been getting beaten on like a heavy bag in Mike Tyson’s prime for the last seven months. So their asset base (aka companies they’ve funded) was also getting crushed.
Better Yields: As people have looked for better yields, they also had an outflow of deposits. Silicon Valley Bank’s client base isn’t the “park it and forget it crowd,” they’re more of the “money optimization” crowd. So they went hunting for better yields.
Strike one… two… three.
Those are the structural reasons it collapsed, and strike one hit all banks (regional and otherwise). Strikes two and three are more unique to Silicon Valley Bank than other banks.
Regarding some of the reported actions of Silicon Valley Bank selling shares into the collapse, paying bonuses into the collapse, and more, well, if all those things are true I hope some people see jail time for doing that. Being a fiduciary means you put your clients interest above your own, but I don’t know enough to know what is/is not true on that front, so I’ll let the courts sort that out.