“Key turning points which might have led to Silicon Valley Bank failure.”

However, there are many stories, articles, thoughts about the Silicon Valley Bank’s failure. Trying to capture some of the turning points: 

Concentration of deposits where major portion of the deposit was from venture capital funding specially in 2020 and 2021 when it was boom for the venture capital funding. During this period when the banking industry deposit growth was around 37%, the SVB deposit growth was 300%. Another key factor in deposit base was that around two third of deposit portfolio was demand deposit which doesn’t attract any interest expense, but it has a disadvantage as well i.e. money can be easily withdrawn as well (which happened actually in this case). 

Deployment of funds in securities – major deposit portfolio was used to purchase securities rather lending. Lending requires a good risk management scanning process, but it protects your funds until unless there is big financial turmoil but volatility in the securities market is more as compare the lending portfolio. And the same was experienced by SVB when due to increase in interest rate bank incurred unrealized losses. 

Huge Deposit Run off – a situation like ‘Reverse Stress Testing’ happened with the bank where investors and depositors pulled around $42 billion of deposits from Silicon Valley Bank on 9th March ’22, one of the biggest US banks runs in more than a decade, according to the regulator. 

Sale of Securities (Available for Sale) – as per one of the news by BBC, SVB announced that they had sold $21 billion of their Available for Sale (AFS) securities at a $1.8 billion loss and were raising another $2.25 billion in equity and debt. It surprised the investors, who were under the impression that SVB had enough liquidity to avoid selling their AFS portfolio. 

But it seems that the above turning points doesn’t cover the full picture of this fall down of SVB, let’s find out few more initial triggers.  

Silicon Valley Bank (SVB) was specialized in providing financial services to technology startups and venture capital firms. During late 1990 and early 2000, bank heavily financed to technology startups it was a time of dot-com boom. And in 2001 bubble burst many of these companies went bankrupt and which led to significant losses to SVB. 

Further, during financial crisis of 2008 bank suffered huge losses due to its exposure to sub-prime mortgage market and was forced to take $235 million write down of its loan portfolio. The bank also faced increased regulatory scrutiny and had to cut back on its lending activity as a result. However, this restriction may partially answer the question that why bank was putting funds more on securities rather than lending. 

The Theranos scandal: SVB was one of the key lenders to the startup Theranos. However, when it was found that the company's technology did not actually work as it was marketed, SVB was left with a significant amount of unpaid loan. The bank was left with no other option than to write off a $96.1 million loan to Theranos in 2018, which was a significant blow to its financial performance. 

So, we can also put these three additional turning points i.e., dot-com bubble burst of 2001, financial crisis 2008 & the threranos scandal of 2018 in SVB’s failure basked. 

Further, I also read one interesting article published in Fortune “SVB was a hedge fund in disguise–and the banking crisis is an overreaction” BY VASANT DHAR dated March 21' 2023, which raised a very valid question on market value of SVB stock which appreciated around 250-fold between 1993 to 2021 whereas JP Morgan could reach only up to 11-fold and it was 3-fold for Bank of America. Further key findings of the article “Which raises the obvious question: Since banks borrow and lend at roughly the same rates, how could a bank possibly outperform an industry leader by a factor of 20? The post mortem should offer some important lessons for regulators on the creative ways in which businesses can disguise themselves and deflect scrutiny.” 

In conclusion, I would say there are many factors which forced to bank failure but few of the questions are still un-answered like 

• Heading – knowing that bank has a huge exposure on investments (AFS & HTM securities) and considering market volatility conditions why hedging strategy was not exercised. 
• Market Cap Appreciation – what were the forces behind to shoot-up the market price of the SVB scrip where no such wonder happened which justifies this appreciation. 
• Backfill of CRO Position – the CRO position was vacant from April 2022 to January 2023. Why the position was not backfilled, if it would have been filled timely there would have been some early warning/triggers and strategies as well to overcome those. 

And from asset liability management (ALM) perspective there are key components which need to be assessed on a very regular basis viz. liquidity gap, impact on value of assets & liabilities due to change in interest rate (part of IRRBB), Liquidity stress testing and Reverse Stress Testing specially a scenario like huge deposit run off. CareEdge offers a software Kalypto ALM which provides ALM solution covering all types of gaps i.e., static & dynamic liquidity, intra-day liquidity, repricing gap, duration gap analysis, traditional gap analysis. Further it is capable in behavioral modelling of banking products, liquidity stress testing and reverse stress testing and also capable of applying stochastic approach for TGA & DGA.