Greg Becker sat in a red armchair at an invite-only conference in Los Angeles last week, legs crossed, one hand cutting through air.
“We pride ourselves on being the best financial partner in the most challenging times,” SVB Financial Group’s chief executive officer told the Upfront Summit on March 1, a day before his firm was up for Bank of the Year honors at a London gala.
Just a week later, it all fell apart.
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SVB’s collapse into Federal Deposit Insurance Corp. receivership came suddenly on Friday, following a frenetic 44 hours in which its long-established customer base of tech startups yanked deposits. But its fate was sealed years ago — during the height of the financial mania that swept across America when the pandemic hit.
US venture capital-backed companies raised $330 billion in 2021 — almost doubling the previous record a year before. Cathie Wood’s ETFs were surging and retail traders on Reddit were bullying hedge funds.
Crucially, the Federal Reserve pinned interest rates at unprecedented lows. And, in a radical shakeup of its framework, it promised to keep them there until it saw sustained inflation well above 2% — an outcome that no official forecast.
SVB took in tens of billions of dollars from its venture capital clients and then, confident that rates would stay steady, plowed that cash into longer-term bonds.
In doing so, it created — and walked straight into — a trap.
Becker and other leaders of the Santa Clara-based institution, the second-largest US bank failure in history behind Washington Mutual in 2008, will have to reckon with why they didn’t protect it from the risks of gorging on young tech ventures’ unstable deposits and from interest-rate increases on the asset side.
Outstanding questions also remain about how SVB went about navigating its precarious position in recent months, and whether it erred by waiting and failing to lock down a $2.25 billion capital injection before publicly announcing losses that alarmed its customers. Investors and depositors tried to pull $42 billion on Thursday, leaving the firm with a negative cash balance of almost $1 billion, regulators said.
Still, decades of declining interest rates that started in the early 1980s — when SVB was founded over a poker game — made it heresy among market pros to suggest bond yields could climb without roiling the economy. As it turns out, American consumers are doing just fine, with jobs aplenty.
It’s banks, especially smaller ones that are flying below the Fed’s radar, that are now looking like the weakest links. SVB stands as the most extreme example yet of how Wall Street has been blindsided by the dynamics of the global economy after the Covid-induced shock.
Investors aren’t waiting to find out which institution might be next, with the KBW Bank Index dropping the most in a week since March 2020.
At SVB, “there was a lot of risk they were taking on that other banks wouldn’t,” said Sarah Kunst, a managing director at venture capital fund Cleo Capital. “That ultimately was part of their demise.”
Read the full article here by Brian Chappatta, Advisor Perspectives.
