It sounds like a big part of what went wrong with Silicon Valley Bank was that SVB has so many sophisticated depositors that they actually noticed SVB has been broke for a while on a mark-to-market basis. A bank with fewer CFOs among its depositors could possibly have bumped along OK because all this accounting arcana makes retail depositors’ heads hurt. Dumb money like me doesn’t pay much attention, which is why it’s safer for a bank to have lots of dumb money deposits
But the smart money noticed, which set off this panic.
And yet, why was the smart money putting its own cash in a ticking time bomb bank? E.g., Roku, which makes some highly useful devices, had $500,000,000 in SVB uninsured.
According to Michael Cembalest of JP Morgan, Silicon Valley Bank ran a highly risky strategy:
While capital, wholesale funding and loan to deposit ratios improved for many US banks since 2008, there are exceptions. As shown in the first chart, SIVB was in a league of its own: a high level of loans plus securities as a percentage of deposits, and very low reliance on stickier retail deposits as a share of total deposits. Bottom line: SIVB carved out a distinct and riskier niche than other banks, setting itself up for large potential capital shortfalls in case of rising interest rates, deposit outflows and forced asset sales. …
It’s fair to ask about the underwriting discipline of VC firms that put most of their liquidity in a single bank with this kind of risk profile.
But then why was the smart money keeping its money in a bank that chose a strategy that was arithmetically obviously risky?
This isn’t like Washington Mutual failing in 2008 due to the credit risk posed by its borrowers not being aware of their own interest rate risk. Whenever WaMu would host focus groups of its new adjustable rate mortgage borrowers obtained in its huge expansion into Southern California, its researchers would report back that its new SoCal borrowers appeared to be morons who had no clue how much their monthly mortgage payment would go up when interest rates finally rose.
So WaMu stopped holding focus groups and told its brokers to explain as little to borrowers as possible about the terms of its complex Option ARM in which borrowers only paid one percent interest for five years. Trying to explain what happened after five years just confused them and left them with a vague sense of impending doom without actually dissuading them from taking out the loan. Let them enjoy their happiness.
No, Silicon Valley Bank went down because of its own interest rate risk. It chose a strategy that would be highly profitable if interest rates stayed at historically minimal 2020 levels. But how was it supposed to know that the Fed was going to raise interest rates? It’s not like the Fed has been signaling it’s going to raise interest rates, now has it? What do you expect SVB to do: pay attention to what the Fed chairman is saying by subscribing to the Wall Street Journal? That’s like $500 annually.
Seriously, a big question is whether SVB also has credit risk due to its loans to tech start-ups. Are they overpriced?
But a big reason they are so high is because the huge tech firms (Apple, Google, Facebook, Microsoft, and Amazon) are ungodly rich, and they hope to be acquired by them.
I could imagine a scenario in which a lot of former unicorns are bought for thoroughbred prices.