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Sunday, 12 March 2023

What really happened at SVB?

Silicon Valley Bank just became the second-largest bank failure in US history: Silicon Valley Bank (SVB) last week became the biggest casualty so far of surging interest rates, collapsing on Friday following a frantic two-day bank run. The bank — one of the most popular banks for startups in the world — was shuttered by US regulators on Friday, triggering panic not just in Palo Alto, but in the UK and China, Canada and India as startups worldwide faced the prospect of losing bns of USD in deposits.

The story’s Egypt angle: Scores of local startups are believed to have deposits at SVB, as we note above.

How did this happen? Fundamentally, it looks a lot like this:

#1- Startups raised tons of money amid the flood of cheap cash in 2019-early 2022. Hardly a day went by in any market around the world without a tech company touting its latest raise. Most threw the money in the bank, and SVB was the bank of choice.

#2- That means SVB had tons of deposits and wasn’t going to make a ton of money putting it to work in the form of productive loans. That’s fundamentally how banks make money: Take on low-cost deposits, give out more-expensive loans (and tack on a bunch of fees). So SVB engaged in what we in Egypt like to call “treasury operations”: It used those deposits to buy long-dated asset-backed securities and corporate paper — securities it bought when interest rates were at historic lows.

#3- Then the Fed started drawing the era of cheap money to a close, shrinking its balance sheet and (critically) raising interest rates. SVB had tons of cash tied up in long-term, fixed-rate securities — illiquid securities that, if it sold today, would see it losing money: The value of long-term, fixed-rate securities goes down as interest rates go up.

#4- The slowdown in fundraising on Planet Finance prompted plenty of companies to start drawing down their deposits. In simple terms: Less VC cash coming in meant more startups were pulling more money from SVB to finance their daily operations.

#5- SVB decided to raise fresh cash and announced it before it was completed. Their equity partner pulled out, word spread the bank was in danger, and startups started pulling their deposits, starting a good, old-fashioned bank run. One downgrade from Moody’s on Wednesday (it had previously rated the bank A1) added fuel to the fire, precipitating the collapse of the country’s sixteenth-largest lender in just 48 hours.

The financial markets didn’t react well to the news: Stocks fell worldwide on Friday as investors headed for safe havens amid talk of contagion and further weak links in the US banking system. The S&P 500 came close to turning negative YTD after falling 1.5%, while yields on two-year treasuries plunged 28 bps and gold rose more than 2.0%. Meanwhile, more than USD 70 bn was erased from the crypto markets on Friday, pushing BTC to dip below the USD 20k mark for the first time since January.

Investors are begging for government intervention: Investor Bill Ackman, Y Combinator’s Garry Tan and entrepreneur David Sacks are among those warning of systemic contagion and are calling on the government to act to guarantee deposits immediately.

Must read: Startup bank had a startup bank run, by Bloomberg’s Matt Levine.

The news is dominating the international business press this morning: FT | Reuters | Wall Street Journal | Washington Post | Bloomberg | CNBC | New York Times.

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