Making waves in financial markets is the failure of Silicon Valley Bank (SVB).

Tuesday, March 7th – SVB was notified by Moody’s of a downgrade on its debt.

Wednesday, March 8th – SVB sold $21bn in securities which included bonds and other tradeable assets, these securities were sold at a $1.8bn loss. To cover the $1.8bn shortfall in reserve requirements, they announced an equity sale of the same amount.

Thursday, March 9th – Spooked depositors started pulling money out of the bank very rapidly and the share sale was cancelled due to back-to-back 60% drops in the stock price over two trading days. Depositors pulled $42bn on Thursday alone, which was 25% of the bank's deposits. This was a classic run on the bank. As of the close of business on March 9th, the bank had a negative cash balance of $958 million.

Friday, March 10th – The bank was seized by regulators because they did not meet their reserve requirements with the Federal Reserve.

Sunday, March 12th – The FDIC and US government guarantees all deposits at SVB. Not just deposits up to $250k.

About 50% of SVB’s customer base is comprised of startups and venture capitalists because their service offerings appeal to the industry. When interest rates went down in 2020, capital was easy to access and the environment allowed venture capital to thrive. The opposite can happen when interest rates go up. Venture capital money started to dry up and the start ups broadly did not slow their cash usage. Withdrawals have steadily increased at SVB since 2021. With deposits slowing, this created a shortfall that just came to a head in March.

The failure of SVB can have spillover effects to other banks. If confidence is shaken, depositors will rush to withdraw their money for fear of not being able to access it later. This is known as a classic bank run. The FDIC does insure deposits up to $250k but 97% of SVB’s deposits exceed those limits, largely because of business deposits. Depositors of other banks start to question if they’ll be able to get their money out and runs on other banks could start. It’s why the FDIC and US government were so quick to step in and try to restore confidence in the system.

25% of SVB’s depositors wanted their money and that was enough to cause the bank to fail. That amount of stress could cause many other banks to fail too. Confidence in the banking system is the regulators’ main concern. They don’t want contagion to impact more banks or regions.

The depositors are being made whole so the next step in the process is breaking down SVB and selling the parts. It looks like the number of assets will be more than enough to cover the deposits but liquidating that takes time. This is why regulators have stepped in providing deposit guarantees while the liquidation process occurs. The FDIC will most likely administer the sale of SVB to another bank.

Will this happen to other banks? At this point, other banks that have been impacted are Signature Bank, Silvergate Bank, and First Republic. Signature Bank had exposure to the crypto markets and has been seized by regulators. Same with Silvergate. First Republic caters to start ups, similar to SVB, and is one of the larger regional banks. They are being heavily scrutinized right now and as of Monday, March 13th, their stock is down about 75% since Wednesday, March 8th.

There is concern with brokerages, specifically Schwab, where liquidity is being questioned. This is driven by fear and speculation that money market deposits aren’t safe. We believe this isn’t the case and it looks like the issues are specific to regional banks that serve a high concentration of specific industries. Transferring money out of brokerages typically funnel through bank channels so an increase of withdrawals may add stress to the banking system.

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