Silicon Valley Bank was closed by regulators. This was the premier bank for Silicon Valley and tech start ups. What was the reason? Blame the Fed’s drastic rate increases and aggressive bank mismanagement. Here’s a good piece from Fidelity explaining what happened. The company offered higher deposit rates to large customers. In return, these companies signed exclusivity deals to keep all their money at SVB. SVB bought a lot of bonds when interest rates were low. Tech startups were losing money and needed to draw down cash. SVB sold Treasury bonds at a 10% loss. They quickly tried raising equity by selling shares. The situation deteriorated from there. Large corporate customers tried withdrawing. The bank panic started. Many smaller banks were targeted if they were too concentrated.
The Federal Reserve has created a new facility for banks to exchange high quality collateral for cash. SVB equity holders will be wiped out and all depositors made whole. Moral hazard and negative externalities at their finest. The same relief takes months for those with student loans.
Here is the notice on SVB’s website.
Wishing you better banking health than SVB.