NEWS REPORT ANALYSIS

Why did the $212bn tech-lender Silicon Valley

bank abruptly collapse?
Source- The Guardian
Author- Edward Helmore
Date- Saturday, 18 March 2023

Presented By-
25077379 Vani Ambardar
14204388 Maheshwaran Catakulathur Harikrishnan
25087762 Sheikh Maruf
25090109 Faith Chebet Yator
25034719 Hossain Ahmmed Fahad
HOW TO GO ABOUT THIS ANALYSIS?

ABOUT THE BANK GATHER THE FACTS

1 2
WHY THIS HAPPENED
3 4 WAY FORWARD
About the Bank
 About Silicon Valley Bank
3
1
In 1983, Bill Biggerstaff and
Robert Medearis, along with the
A subsidiary of SVB Financial
bank’s CEO Roger Smith,
Group, was the 16th largest bank
opened the first branch in San
in the United States. The bank
Jose, California. It went public
had assets of about $209
in 1988 and, in 1989.
billion in December 2022.

2 4
Silicon Valley Bank eventually
Silicon Valley Bank provided grew to be one of the largest
business banking services for commercial banks in the U.S. It
companies at every stage, but it was saw major growth during and after
particularly well-known for serving the pandemic between 2019 and
startups and venture-backed firms. 2022.
 GOAL

To provide credit and banking

services to Silicon Valley’s
INITIAL WHY TARGET The Companies were unable
growing number of startup STARTUP to show assets and profits in
technology companies which PRIMARY TECHNOLOGY order to be considered
was a market that at the time
was overlooked by the financial GOAL COMPANIES?
creditworthy by Financial
Institutions
services industry;
Biggest growth happened
during the corona pandemic
between 2019-2022 when it
nearly tripled in size rising in At this point SVB was well
rank from the 34th bank to the known for serving startups
16th bank with a total of bank The Growth and venture backed firms.
assets of about 209 billion USD
by December 2022. of SVB
 Period 2019 - 2022

During this period the The bank held a small While the treasury
bank had a significant amount of those deposits bonds have relatively
amount of deposits and in cash and used most of low returns, they also
assets. the excess to buy treasury have relatively low
bonds and other long-term risk.
debts.
Gather all the Facts
 TIMELINE OF COLLAPSE
First Citizens Bank
The stock for Silicon bought all of Silicon
Valley Bank’s holding Valley Bridge Bank
company, SVB except for $90 billion of
Federal regulators
Financial Group, securities and other
announce emergency
crashed at the market assets that remained in
measures
opening FDIC receivership.
March 12, 2023 March 26, 2023
March 9, 2023

March 8, 2023 March 10, 2023 March 17, 2023

SVB announced its $1.8 Trading was halted for Silicon Valley Bank's
billion loss on its bond SVB Financial Group parent company, SVB
portfolio, along with plans stock. Before the bank Financial Group, filed
to sell both common and could open for the day, for bankruptcy.
preferred stock to raise federal regulators
$2.25 billion. announced they would
take it over.
 MAJOR INVESTORS
The Sufferers of consequences of actions of Collapse
SVB Financial Group, the parent company of Silicon Valley Bank, is primarily owned by
institutional investors. The largest shareholders include:

01 02 03 04 05
The SSgA BlackRock Alecta JP Morgan
Vanguard Funds Fund Pension Investment
Group, Inc. Manageme Advisors Insurance Management,
nt, Inc. Mutual Inc.
 KEY POINTS TO NOTE

04
03 While the FDIC can protect depositors from losses, it can’t
do the same for shareholders and unsecured debt holders. In

02 other words, individuals and institutions that owned stock in

SVB Financial Group may not get their money back

01 To help, the Federal Reserve announced that it would

invoke a systemic risk exception, meaning that all
depositors would be made whole, even for those funds
that were uninsured.

Unfortunately, most of the accounts in Silicon Valley Bank held

more than $250,000 of deposits, meaning most of the funds were
uninsured.
The FDIC insures bank deposits of up to
$250,000 per depositor per bank for each
account category.
 Who paid for what happened?

WHY DID THE GOVERNMENT MAKE THIS

01 DECISION?
Fear of contagion—the impact the bank’s collapse could have on the economy as a whole.
Amid the bank collapse, it was not just Silicon Valley Bank whose stock price plummeted.
Other banks saw their stock prices drop too.

WHAT DID IT MEAN FOR TAXPAYERS? 02

It would be too simplistic to say none of the losses will be borne by taxpayers. While
you may not pay for the losses directly with your tax dollars, some losses could
ultimately trickle down. For example, if your bank has to pay more for deposit
insurance, it might charge you a higher interest rate on a loan or pay you a lower
percentage of interest in your savings account.
 CONSEQUENCES
01
In the lead-up to the Silicon
Valley Bank collapse, the
Federal Reserve and other
central banks had been
increasing interest rates as a
way to fight global inflation.
But the Fed's next rate increase
was lower than expected prior
to the bank failures.
02
As a result of the Silicon
Valley Bank collapse, the
government announced the
Bank Term Funding Program
(BTFP), a program authorized
by the Federal Reserve that
offers loans to banks, credit
unions, and other deposit
institutions.
Why did this happen?
 02
MANAGEMENT OF
SILICON VALLEY
BANK

01
INTEREST RATE
AND INFLATION
TRUMP'S DEREGULATION
POLICIES ON THE COLLAPSE

03
Silicon Valley Bank’s Investments
01
Due to the increase in interest rate by the Federal reserve
to combat high inflation, Silicon Valley Bank’s bonds
became riskier investments and declined in value.

02
Many of SVB's depositors were startup
companies. They deposited large amounts of
cash from investors.

03
SVB faced large withdrawals due to their
declining asset value so SVB decided to sell some
of its investments but made huge losses of $1.8
million.
FINANCIAL DATA

During the six-month period SVB experienced a decrease, in

its assets from $209 billion to $175 billion. Additionally, the
deposits declined from $175 billion to $150 billion. The net
income also saw a decline from $2.0 billion to $1.5 billion, in
the period. Moreover, SVB’s common equity Tier 1 capital
ratio decreased from 10.0% to 8.5% over the course of six
months.
SILICON VALLEY BANK MANAGEMENT SHORTFALLS
Insufficient Board Oversight

Did not mееt regularly to discuss risk management.

Did not have a clear understanding of the risks associated with the
bank's investment strategy.

Did not have a process for identifying and managing conflicts of

interest between the bank and its board members.
SILICON VALLEY BANK MANAGEMENT SHORTFALLS
Incomplete Modeling

The bank's risk models underestimated the impact of rising interest

rates on the value of its portfolio.

The bank's risk models overestimated its ability to generate

liquidity in a time of stress.

The bank's risk models did not adequately account for the risks
associated with the bank's rapid growth.
SILICON VALLEY BANK MANAGEMENT SHORTFALLS
Poor Liquidity Management

The bank had a high proportion of uninsured deposits (70%).

The bank had a large proportion of deposits invested in hold-to-

maturity securities (50%).

The bank did not have a clear plan for managing its
liquidity needs in a time of stress.
SILICON VALLEY BANK MANAGEMENT SHORTFALLS
Lack Of Diversification

The bank had over 20% of its portfolio invested in long-term U.S.
Treasuries.

The bank did not have a clear investment strategy for managing its
exposure to interest rate risk.

SVB's investment portfolio was not sufficiently diversified. The bank had a large
exposure to long-term U.S. Treasuries, which are sensitive to rising interest rates.
SILICON VALLEY BANK MANAGEMENT SHORTFALLS
Tying Executive Compensation To Short-term Profits

Tied a significant portion of executive compensation to short-term

financial performance metrics, such as earnings per share and
revenue growth.

Did not adequately incentivize executives to focus on long-term

risk management.
SILICON VALLEY BANK MANAGEMENT SHORTFALLS
Lack Of A Chief Risk Officer

SVB did not have a permanent chief risk officer for roughly a year during a
time when the bank was growing quickly.
TRUMP'S DEREGULATION POLICIES ON THE COLLAPSE

Reduced regulatory
Weakened stress tests Encouraged riskier
oversight The EGRRCPA also made
The EGRRCPA, also known investments
changes to stress tests, for The EGRRCPA implemented
as the Economic Growth,
banks which're evaluations modifications to regulation
Regulatory Relief and
used to determine a banks resulting in banks having
Consumer Protection Act
ability to withstand an leeway to engage in riskier
increased the asset threshold,
economic downturn. As a result investments. SVB capitalized
for banks that are classified
of these changes it became on these alterations by making
as " big to fail" from $50
simpler for banks to meet the investments, in long term U.S.
billion to $250 billion. As a
requirements of stress tests. Treasuries. Nonetheless the
result of this change SVB,
This made SVB more value of SVBs Treasury
which had assets totaling
vulnerable to a liquidity crisis holdings experienced a decline
$209 billion at that time was
in the event of a sudden when interest rates started to
no longer subject to the level
downturn in the economy. rise in 2023.
of scrutiny, as larger banks.
TRUMP'S DEREGULATION POLICIES ON THE COLLAPSE

The Volcker Rule, The Consumer Financial

which forbids banks Protection Bureau
from using their own (CFPB), which guards
funds to make against
hazardous investments, financial misuse, was
was undermined by the undermined by the
Trump administration. Trump administration.
This would have Customers may have
made it possible for found it more
SVB to increase the challenging to protest to
amount of risk it took SVB as a result if the
on in its investment bank's actions caused
portfolio, which might them
have led to its demise. harm.
TRUMP'S DEREGULATION POLICIES ON THE COLLAPSE

Trump also selected officials who favored deregulation, for

roles within the Federal Reserve and other financial
regulatory bodies. These individuals proceeded to relax
regulations that were implemented in response, to the 2008
financial crisis. This relaxation of rules increased the fragility
of the system ultimately playing a role in the downfall of
SVB.
TRUMP'S DEREGULATION POLICIES ON THE COLLAPSE

It's worth noting that there is no consensus, among analysts

regarding whether the Trump administration's policies led to
the downfall of SVB. However some experts suggest that
these measures could have potentially influenced the bank to
engage in actions and created challenges, for customers in
protecting their interests.
Conclusion
SVB would have recovered its capital if they held those bonds until their maturity date but their downfall was due
to the unexpected increase in the monetary policy and their poor assessment of risk management.
Ripple effects:
High deposits to reinsurance companies for banks causing
a. Charging higher interest rate on loans
b. lower percentage of interest for savings account.