The collapse of Silicon Valley Bank (SVB) is causing ripples throughout the economy, with potential impacts on the crypto space and broader economy. As the 16th largest bank in the US, SVB had made a name for itself as the go-to bank for startups, offering attractive loans in exchange for exclusive banking. However, over 85% of the funds deposited with SVB were in accounts over the $250k FDIC-insured limit. SVB bought longer dated securities, such as Treasury bonds and mortgage-backed securities, which were sensitive to interest rate changes, causing significant losses when rates rose. SVB lost its equity base of $16.2bn due to market losses on holdings in excess of $15bn by the end of 2022. While Moody’s downgraded SVB after revealing plans to sell $20bn in lower-yielding bonds to invest in high-return assets, news of the potential share sale caused a ‘bank run’ with start-ups and founders scrambling to withdraw funds from the bank. SVB banked around 65,000 US startups that were impacted by the collapse. The bank was embedded right in the heart of the crypto economy as Circle Financial used the bank to store cash reserves that backed up its USDC stablecoin. The assumption is that every coin issued has a corresponding dollar in reserve at a bank or other financial institution, and USDC’s success and growth depend on the financial institutions that back it.
The Collapse of Silicon Valley Bank: A Potential Extinction Level Event for Startups and a Ripple Effect Across the Economy
Silicon Valley Bank (SVB) has collapsed, making it the second biggest bank failure ever and the largest bank run since the great financial crisis. This collapse has the potential to cause an extinction level event for startups and is the cause of the worst stablecoin debegging since terror’s UST. The ripple effect of the collapse is already being felt across the economy and those ripples could turn into a tsunami if the bank run spreads to other banks.
Background on Silicon Valley Bank
At the time of its insolvency, SVB had about $209 billion in assets and was the 16th largest bank in the United States. SVB made a name for itself on the startup scene, claiming to have banked at least half of the US’s venture-backed startups. They managed to do this by offering attractive loans to startups in return for these startups using them as their exclusive bank. In addition, SVB had a strong relationship with startup founders and the VCs that backed them. This created additional incentives for these founders to use the bank, given that SVB also provided personal banking services to these founders, as well as attractive mortgage deals.
The Problems with SVB
The problems with SVB were broader than the fact that over 85% of the funds deposited with the bank were in accounts over the $250k balance, which means that if the bank were to go bust, customers would have to enter the receivership queue. Given how flush with cash the startup scene was, SVB could not originate loans nearly as quickly as money was coming in. This created a situation where over 120 billion dollars were invested in longer-dated securities, such as Treasury bonds, and mortgage-backed securities. As rates began to rise, the value of these bonds started to fall, resulting in market losses of over 15 billion dollars at the end of 2022. SVB didn’t have any interest rate hedges or other risk management in place. A bond portfolio of $120 billion with an average duration of 5.6 years means that for every 10 basis point rise in the five-year treasury, the bank lost about $700 million, leaving the balance sheet a ticking time bomb.
The Collapse of SVB
SVB got a call from Moody’s, the ratings agency, telling them that they were planning to downgrade the bank on account of the falling value of its bonds. Worried that this could precipitate a crisis, SVB called in the Goldman bankers for advice, and the plan was to sell $20 billion in lower yielding bonds and reinvest that into assets that delivered higher returns. However, they would have to realize losses of up to $1.8 billion. Moody’s only downgraded them by one notch with the understanding that the share sale raise would go ahead and that there was a plan to recapitalize the bank. However, it all happened too fast, and once news got out about this potential share sale plan, the stock plunged, leading to a collapse of SVB into the hands of the FDIC.
The Ripple Effect of the Collapse
The collapse of SVB had a particularly significant impact on another large company that had embedded itself in the heart of the crypto economy. Circle Financial used SVB as one of the banks to store cash reserves that backed up its USDC stablecoin. As a fiat-backed centralized stablecoin, the collapse has been the cause of the worst stablecoin debegging since terror’s UST. The collapse of SVB has led to legitimate concerns by thousands of startups over how they were going to make payroll in the new week. The ripple effect of the collapse across the broader economy is already being felt, and those ripples could turn into a tsunami if the bank run spreads to other banks.