Silicon Valley Bank is a financial institution primarily serving technology companies and venture capital firms in Silicon Valley. The bank has been growing rapidly in recent years, with its deposits increasing from around $62 billion at the end of 2019 to nearly $190 billion by the end of 2021. However, the bank’s rapid growth has led to a liquidity issue.
In order to generate a yield on its growing deposit base, Silicon Valley Bank invested heavily in long-duration mortgage-backed securities (MBS). Specifically, about 97% of the bank’s $80 billion investment in MBS were 10-year maturity MBS that the bank intended to hold until maturity. The bank made this investment decision because US Treasuries provided very low yields (0–0.25%) at the time, and the MBS products that SVB was purchasing had a yield above 1.5%.
The problem with this strategy is that the money that Silicon Valley Bank used to buy these long-duration assets was not its own money but rather customer deposits. If a large number of customers suddenly wanted to withdraw their deposits, the bank could face a liquidity crisis. This is exactly what is happening now.
Recent events have shaken customer confidence in Silicon Valley Bank. The bank recently had to realise losses on some of its medium-duration securities, which created a $1.8 billion loss for the organisation. This was in addition to the unrealised losses that the bank and other financial institutions are holding on their securities, which total in the hundreds of billions of dollars. Silvergate Bank, another financial institution, also announced that it would wind down operations and liquidate assets due to a duration mismatch in its portfolio.
Silicon Valley Bank tried to raise additional capital to shore up its financial position by taking on $500 million from General Atlantic and conducting a $2.25 billion equity and debt offering. However, this move backfired, as it only eroded customer confidence further. Customers began withdrawing their funds frenetically, putting pressure on the bank to sell its underwater securities and realise losses to honour those withdrawal requests.
The situation quickly spiralled out of control, with founders and venture investors aggressively withdrawing their funds and the bank’s stock plummeting by almost 70%. CNBC reported that the bank had hired advisors to help sell the business after it failed to raise enough capital to shore up its financial position. It remains to be seen what the ultimate outcome will be for Silicon Valley Bank, but it is clear that the bank’s rapid growth and investment strategy have put it in a precarious position.