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2nd largest US Bank

faliure after 2008
SVB and its Asset-liability mismatch

Silicon Valley Bank (SVB) mainly catered to VCs,

technology startups and PE firms.

As the tech industry boomed in 2021, its deposits

also grew, rising 86%. But it was not able to grow
its loan book fast enough.

So, it decided to park nearly half of the deposits in

long-dated bonds, when rates were lower (making
bond’s valuation high).

This substantial increase in long-term assets(high

duration bonds) were funded by short-term
liabilities(deposits) causing a maturity mismatch.
Effect of interest rate hikes

As the Fed raised rates to curb inflation, the Tech

industry started tumbling.

As a result, the startups drained their deposits faster

than the bank expected, also stopping any new
investments/deposits.

Coming to assets, huge amount was tied in long-term

bonds, which lost $15bn of value due to the interest
rate hikes.

The bank needed fresh capital to meet its financial

obligations.
How it failed ?

It hired Goldman Sachs, earlier this week to execute

a private stock sale, with plans to announce it upon
completion to avoid spooking investors.

Then, Moody’s informed SVB of the plan to

downgrade its credit ratings.

SVB feared, a downgrade would harm it more than a

share sale. It managed to get a PE firm to commit to
the stock-sale deal and announced it after the
market closed Wednesday.

It also announced that it sold $21bn of securities

from its bond portfolio at a $1.8bn loss. Moody’s
downgraded it later that evening.
These events led to sharp fall of its shares, after the
market opened Thursday, also alarming the
customers, who began pulling out their deposits to
avoid getting stuck.

VCs also advised the startups to pull their money

out of the bank to avoid losses.

SVB’s stock fell more than 60% to $106. Goldman

bankers arranged for SVB to sell shares at $95 apiece
on that afternoon.

But as the stock kept tumbling and more customers

pulled their deposits, that deal fell apart.

On Friday, it raced to find a buyer but the US

regulators were not willing to wait and finally took
its control.
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