On Friday, regulators closed the Californian bank and placed it under the control of the Federal Deposit Insurance Corporation (FDIC).

The rate of death of the SVB was enormous. SVB CEO Greg Becker was on a conference call with investors on Tuesday, answering questions about how he spends his free time. A few days later, the bank he managed collapsed.

SVB has been one of the biggest beneficiaries of the boom in Silicon Valley over the past few years

But the seeds of SVB’s demise were sown two years ago, in 2021. It’s worth reading for an explanation text by Mark Rubinstein, an expert on financial markets.

SVB has been one of the biggest beneficiaries of the boom in Silicon Valley over the past few years. As huge venture capital was invested in SVB-funded start-ups, billions of dollars came as deposits to SVB.

The bank was sitting on a mountain of cash – from 102 billion dollars, it reached 189 billion dollars in deposits. This money had to go somewhere.

Seeking yield in an era of ultra-low interest rates, the bank invested in a $120 billion portfolio of securities, including $91 billion in fixed-rate mortgage bonds with an average interest rate of just 1.64%, preserving cash for more than a decade and will face losses if interest rates rise rapidly.

Since this is exactly what has happened to interest since last year, the value of the portfolio has fallen by $15 billion, which is almost equal to SVB’s entire capital. The ticks began to tighten. If they sell the bonds, the bank risks becoming insolvent.

It was like a prisoner’s dilemma: every investor knew he was safe if he didn’t withdraw his money as long as everyone else did the same.

In March 2023, about 40 CFOs from various technology groups gathered at the Deer Valley Ski Resort in Utah for the annual summit hosted by Silicon Valley Bank itself. Not even a week has passed since some executives exchanged messages about how appropriate it is to keep their money in SVB, writes the FT.

The bank just sold $20 billion worth of securities (a loss-making sale, but needed for cash) to cushion a sharp drop in deposits, drawing investors’ attention to the vulnerability of its balance sheet. It was like a prisoner’s dilemma: each investor knew that he was safe if he did not withdraw his money on the condition that others would do the same. But everyone saved their skin as best they could: most took their deposits and transferred them to JP Mirgan, HSBC or other banks. Everything happened in a few days.

Customers initiated withdrawals of $42 billion in one day – a quarter of the bank’s total deposits – and it could no longer meet the demands

On Friday, the bank went bankrupt. Customers initiated withdrawals of $42 billion in one day — a quarter of the bank’s total deposits — and it couldn’t keep up with the demands. The Federal Deposit Insurance Corporation — the U.S. banking regulator that insures deposits of up to $250,000 — moved into the bank’s headquarters in Santa Clara, Calif., declared it insolvent and took control.

The CEO of the bank tried to organize a public offering of the bank’s shares through Goldman Sachs, and General Atlantic undertook to buy shares worth 500 million dollars. It happened on Wednesday night. However, the deal fell through on Thursday.

“Silicon Valley Bank’s problem is compounded by its relatively concentrated customer base. At the end of 2022, the bank had 37,466 depositors, each of whom has more than $250,000 in their account. It’s great when business is booming, but terrible when the market shrinks,” says Rubinstein.

SVB’s decision to sell securities was a signal to the market that the bank no longer has cash. Large investors such as the Peter Thiel Foundation have already advised companies to withdraw their money from SVB. During a series of meetings with SVB’s clients and investors, Becker told them not to panic. But it was too late.

Ed: Financial group SVB, which focuses on tech startups, has suffered its biggest collapse since the 2008 financial crisis, rocking global markets, sending shares tumbling and leaving tech founders wondering if they can pay workers. The US Federal Reserve announced that it will hold a closed-door meeting of its board of governors on Monday under an accelerated procedure, Reuters reports. The central bank did not provide further details, but the announcement followed the collapse of Silicon Valley Bank on Friday, the biggest bank failure since the 2008 financial crisis.