You might have heard Silicon Valley Bank (SVB) failed this past week. I don’t usually write about news, but SVB’s collapse was quite a stunning story.
If I were to explain what happened in the simplest possible manner:
- SVB banked mostly with startups and tech companies. The bank took in large amounts of deposits over the last few years because its customers could easily access money with low interest rates.
- Demands for loans were low during the pandemic. Sitting on too much cash, SVB decided to buy longer-term investments (e.g. 10-year U.S. Treasury bond) with a higher return. The risk was that the bank wouldn’t be able to get their money back quickly, but the bank wasn’t concerned. For a while, the strategy worked well.
- Inflation spiked last year, so the Federal Reserve increased interest rates to cool down the economy. Meanwhile, SVB’s customers had difficulty raising money and started to withdraw. The magnitude of withdrawals surprised SVB. Their cash reserve dwindled.
- Under better circumstances, SVB could have sold its investments to cover the withdrawal. However, the bank had trouble this time because the value of their investments had plummeted due to the interest rates spike.
- On March 8 (Wednesday), SVB made a surprise announcement to raise additional capital ($2.25 billion) with little context. That scared more people to withdraw money from the bank. Chatter started to spread on Twitter in the venture capital and tech community.
- The confluence of events resulted in a “run” on the bank. By March 9 (Thursday), everyone wanted their money back. Withdrawal requests were over $40 billion in a single day. The bank ran out of cash by the end of the day.
- By law, the government regulator (FDIC) stepped in and took over mid-day on March 10 (Friday).
This story is a reminder that the tide can turn quickly. An established organization that looks formidable can crumble anytime.