SVB's Collapse Rooted In Treasury Bets During Pandemic: 'Once It Started, There Was No Stopping It'

Silicon Valley Bank, a unit of SVB Financial Group SIVB, was shut down on Friday by the California Department of Financial Protection and Innovation because of "inadequate liquidity and insolvency." The Federal Deposit Insurance Corporation was named as the receiver for the bank.

Pershing Square Capital Management's Bill Ackman called out Silicon Valley Bank officials for their mismanagement of the institution and the federal government for not properly monitoring the bank's activity, leading to the collapse.

During a recent conference in Los Angeles last week, Bloomberg quoted SVB Financial Group's chief executive officer Greg Becker saying, "We pride ourselves on being the best financial partner in the most challenging times."

Just a week later, Silicon Valley Bank collapsed after a stunning 48 hours in which a bank run and a capital crisis led to the failure of the financial institution.

Regulators said investors and depositors tried to pull $42 billion, leaving the bank with a negative cash balance of almost $1 billion. According to the report, SVB's fate was sealed long ago when the financial crisis loomed over the U.S. following the COVID pandemic.

During that time, the Federal Reserve held interest rates at an unprecedented low level. Moreover, the Fed promised to keep them there until it saw inflation well above 2%.

SVB took billions of dollars from its venture capital clients as it was confident that rates would stay steady. It then plowed that cash into longer-term bonds, as reported by Bloomberg. 

Also Read: Larry Summers Says Consequences 'Severe' If Silicon Valley Bank Crisis Isn't Properly Resolved

"At SVB, there was a lot of risks they were taking on that other banks wouldn't," Bloomberg quoted Sarah Kunst, a managing director at venture capital fund Cleo Capital. "That ultimately was part of their demise."

When the country was reeling under the pandemic in 2021, SVB's clients were flush with cash. According to the Bloomberg data, SVB's total deposits exploded higher over the prior 12 months, to about $124 billion from $62 billion.

As of Dec 31, 2022, more than 93% of domestic deposits with SVB were uninsured as the FDIC only insures bank deposits of up to $250,000.

SVB's severe losses on long-term bonds, following rapid deposit growth, largely went under the radar due to accounting rules. 

The bank had mark-to-market losses of over $15 billion at the end of 2022 for securities held to maturity. Bloomberg reported that it was almost equivalent to its entire equity base of $16.2 billion. 

"SVB didn't have nearly as much capital as an institution that risky should have had," Bloomberg quoted William Isaac, the former chairman of the FDIC, speaking in an interview. "Once it started, there was no stopping it. And that's why they just had to shut it down."

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Photo: Illustration from BZ and Shutterstock