Why Did SVB Go Down? What Next?

SVB, Signature, and Silvergate went down for different reasons:

SVB’s demise in a nutshell in 6 points:

*1) Basic Bank Math:*

Banks take deposits and use them to make loans. The delta between interest on loans and interest paid to depositors is the ‘net interest margin’ (“NIM”) – the core metric of bank profitability. And the delta between assets and liabilities is the bank’s equity – the core metric of bank safety. To generate positive NIM, banks make long-term loans at higher rates than they pay on deposits.

*2) Bank Math at SVB:*

Before the issues, SVB held $212B of assets against $200B of liabilities – a paper equity cushion of $12B (5.6% of assets).

The assets fall into 3 buckets:
#1: Mortgage-backed securities: $82B (83% residential)
#2: Direct loans: $74B (55% short-term loans to VCs & PE)
#3: Liquid assets: $55B

The liabilities fall into 2 buckets:
#1: Deposits: $174B (~11% FDIC insured)
#2: Other debt & pref: $25B

*3) What happened?*

The Fed raised rates, making all long-term debt decline in value.
Including SVB’s assets.
But accounting rules let SVB book mortgage securities as “held-to-maturity” (HTM), avoiding a hit to book equity.
In a December footnote, however, it disclosed the HTM book had $15B of “unrealized” (i.e., off-book) losses.
So even then, losses had wiped out the $12B equity cushion.

*4) What catalyzed the run?*

The wipeout of the bank’s tangible equity cushion was concerning.
So what changed?
SVB announced Wednesday it had sold $21B of liquid assets (from bucket #3) at a 9% loss and would raise money to cover the loss.
That concerned investors a bit – more significant losses than expected and a poor NIM outlook.
But, more significantly, it spooked depositors (and their VC investors).

*5) Bank run*

The next day (Thursday), depositors attempted to withdraw $42B from the bank, of which math implies ~$16B succeeded.
Leaving the bank with negative ~$1B of cash when the FDIC took over Friday.

*6) Simplistic recovery math*

The balance sheet is pretty straightforward, given how rapid the event was.
The starting point is ~$10B of paper equity ($12B minus the $2B recognized AFS loss).
The range of HTM & other book loss is $20-40B based on the unrealized loss at Dec, the loss on the sale of the AFS book, and market moves.

On net, that impairs assets by $10-30B against a deposit & debt base of ~$162B (deposits of $168B minus the $16B deposit outflow and ~$10B of FDIC-insured deposits, plus ~$20B of other debt).

Add in liquidation cost, which implies a 5-20% loss range on remaining deposits.

Someone smart came up with the dissecting of the balance sheet, and the Investors will spend time putting a finer point on this tomorrow and thereafter. The asset of SVB might be a good buy for banks like JPM. Signature and Silvergate a different issues. Their issues are more related to crypto exposure.

The backstop of the $25 B plan put in by the government is a big deal and should help shore up the banks and the market sentiment. However, the market is now probably in a different kind of turbulent water.

This is not a Bailout! It helps the depositors get their funds out, and investors would need to make deals with the buyers of the assets to recuperate funds.

1: VCs are now tepid with new investments.
2: Neo Banks and fintechs are entering a downcycle. Raising new rounds would be difficult.
3: Seed companies may need to have more unpriced SAFEs than priced rounds.
4: Growth companies may face some headwinds but not be affected as much.
5: Series B onwards will probably face significant headwinds.

Credit: CNBC, Pitchbook, Rick F Wallace, Axios, Harvard PE VC group