Silicon Valley Bank Collapses - #8
Hey everyone!
It's unfortunate to report the latest news that is unfolding as I write this edition of the newsletter. This week, Silicon Valley Bank (SVB), the most "startup-friendly" bank in the U.S., is facing its worst crisis due to a series of missteps and bad timing.
What's going to happen now? How does this impact the startup ecosystem worldwide? How does this affect LATAM startups?
I don't have all the answers, but we'll likely see reactions and ripple effects in the coming days. In this edition, I'll explain what happened (in simple terms) and discuss the initial global consequences.
*Disclaimer: I'm not a financial analyst, so the information here is based on my own research from various internet sources.
The Collapse of Silicon Valley Bank (SVB) Explained
Here's some context if you're not familiar with SVB:
It had $190 billion in customer deposits (end of 2021).
Its primary clients are venture capital (VC) funds and VC-backed startups.
It's the 20th largest bank in the U.S.
Sequence of Events Leading to the Collapse:
SVB had to do something with its customer deposits. It either lends the money or invests in assets. Given that it had over $190 billion, it was challenging to lend that amount in a short period.
For this reason, and others, in 2022, SVB bought $80 billion in "Mortgage Backed Securities" (MBS).
This worked until the U.S. government's policies threw a wrench in the works.
With interest rate hikes, U.S. Treasury bonds became more attractive than the securities held by SVB. Treasury bonds have "zero" risk and offer 2.5x the return compared to MBS.
This resulted in a loss for the bank. SVB's stock began to drop.
Greg Becker, SVB's CEO, needed to act quickly to prevent further decline.
His strategy involved building a "safety net" of cash by doing two things: 1) Selling assets from the portfolio, and 2) Issuing new SVB shares.
Typically, this wouldn't be a problem, but something else was happening simultaneously: another U.S. bank was on the brink of collapse.
That bank was Silvergate Bank, one of the most important banks in the crypto world.
Its main client, FTX, collapsed, leading Silvergate Bank's clients to withdraw $8 billion, causing the bank to announce on March 8 that it would cease operations...
This happened on the same day SVB announced its safety net strategy.
Greg and his Head of PR felt comfortable with the announcement until they realized the reaction from their clients.
Their clients panicked upon hearing that their bank needed a safety net after 1) the collapse of FTX, 2) tech layoffs, and 3) fear of a recession.
This triggered a mass withdrawal of funds from SVB, causing the bank's stock value to drop by over $80 billion overnight.
The California regulator intervened and declared SVB insolvent.
-- UPDATE 03/12/2023 --
The U.S. government declared that it would guarantee all deposits from SVB clients, allowing them to access their funds from Monday. HSBC bought SVB UK.
Key Takeaways from This Event:
A communication error can be extremely costly.
Markets are extremely complex and interconnected in multiple ways.
The perceived value by your clients is worth more than the book value.
Additional Ripple Effects and Their Links for Further Insight:
Silicon Valley Bank UK also collapsed.
The stablecoin USDC lost its stability and dropped to 0.9 USD due to a percentage of its reserves being held in SVB.
Roku, Roblox, and other startups disclosed how much cash they had in SVB.
SVB has branches and clients in China, Denmark, Germany, India, Israel, and Sweden, which might also be impacted.
🦉 Quote of the Week "Don't waste time worrying about things you cannot control." — Shunmyo Masuno, The Art of Simple Living
Quote brought back to life thanks to Readwise. Try it for free here.
That's all for today! If you liked this, let me know in the feedback below. If not, tell me as well.
Don't forget to subscribe if you haven't already.
See you next week!