*Update: As I was writing this, the FDIC shut down the bank. The FDIC seized the bank. The FDIC will be able to sell off assets and return money to insured depositors. When there’s a crisis of confidence things can move very quickly. I kept the original text to show how quickly things can change in a few hours. It was the US’s 16th largest bank and the second-largest bank failure in US history.
Q4 2022 hedge fund letters, conferences and more
Bank failures are suddenly the topic du jour.
Silicon Valley Bank has been around for four decades. It was founded in 1983 over a poker game. Monday it might not exist. If SVB fails to raise capital, which I believe won’t go through, it might have to sell itself in a fire sale.
SVB’s is mostly focused on tech and venture investments. Well it’s in the name right? In an era of low interest rates and easy money, SVB was killing it. But the ingredients that made it successful are gone. VC firms have been less willing to fund start-ups—a problem for SVB, which gets deposits from VC-backed start-ups that were earlier flush with cash. Now that money is gone.
As interest rates have risen, many banks have become more profitable because the spreads between what they earn on loans and what they pay for funding has widened. The metric is called the Net Interest Margin, or NIM. With SVB, the NIM has been squeezed. Interest rates have increased, boosting the cost of the deposits the bank uses to fund loans.
SVB’s trouble came after the bank sold bonds worth $21 billion from its portfolio for a $1.8b loss following a decline in deposits. Deposits are a low cost source of funding for banks. As that dries up, banks are forced to turn to their securities portfolio to raise capital but with bond prices down, the banks are selling those securities at a loss. Prices of fixed-income securities such as bonds fall as interest rates go up. SVB rushed to sell off its low-interest bonds, with an inverted yield curve, in which it costs more to borrow short-term money than long-term, creating headwinds for those that are borrowing short-term and lending long. SVB’s portfolio was yielding an average 1.79%, far below the current 10-year Treasury yield of around 4% and 2-year T-Bill at 4.6%.
