Bank panic continues to spread, Silicon Valley Bank plunges 70% in pre-market trading, with some peers halting fund transfers.

Following the announcement of the cryptocurrency-friendly bank Silvergate to wind down, another cash reserve bank of Circle, Silicon Valley Bank, is reportedly facing crisis! The CEO of Silicon Valley Bank stated yesterday that due to higher-than-expected customer deposit outflows and the rising interest rate environment, the company has sold off most of its available-for-sale securities (AFS), resulting in an $1.8 billion loss, and has begun seeking a $2.25 billion financing. Today, Silicon Valley Bank continues to plummet by 71% in pre-market trading, with reports of some peers suspending remittance instructions.

Previous context: Cash reserve bank of Circle in crisis! Following Silvergate's closure, Silicon Valley Bank SVB reveals an $1.8 billion loss, with stock price plummeting by 60%

Silicon Valley Bank

Silicon Valley Bank, founded in 1982 and listed in 1988 under the stock code SIVB, describes itself as a financial partner for the innovation economy, providing financing services to tech startups. It was an early investor in companies like Cisco, Shopify, and Tableau, an interactive business intelligence data visualization software company.

Hot Money Flowing into Silicon Valley Startups

The core business of Silicon Valley Bank focuses on cash deposited by tech startups, which turns into deposits in the bank, and provides loans to venture capital and private equity firms supporting them. In recent years, with the surge in government printing money and tech investments, customer deposits have been increasing significantly, reaching $189.2 billion by the end of 2021.

Customers Keep Burning Cash, but Investors Pull Back

The Federal Reserve's tightening monetary policy with interest rate hikes of over 5% has cooled down the venture capital market. Silicon Valley Bank's customers, mainly in the cash-burning phase of startups, have been withdrawing cash continuously, while the inflow of new money has slowed down. This has led to a continuous loss of deposits for Silicon Valley Bank, forcing it to sell off assets to meet customer withdrawals as a result.

Is Asset Allocation Right?

During the years when Silicon Valley Bank's deposits increased significantly, most of its US dollar deposits were used to purchase long-term securities such as mortgage-backed bonds and US Treasury bonds. As the US benchmark interest rate was only 0.1% at that time, Silicon Valley Bank bought long-term bonds to increase yield. However, the Federal Reserve's aggressive interest rate hikes since 2022, with a 4.25% increase in the federal funds rate within a year, caused a bond market crash. Bond prices and interest rates are inversely related, especially affecting longer-term bonds more significantly. While theoretically holding these bonds to maturity should not result in actual losses, only valuation losses during the process, the continuous outflow of customer deposits led Silicon Valley Bank to sell off its bonds to meet its obligations.

As shown below, only 7% of Silicon Valley Bank's assets are US Treasuries and 14% are government agency securities (Agency Debentures), while the majority are mortgage-backed securities related to real estate, including Residential Mortgage-Backed Securities (RMBS) and Commercial Mortgage-Backed Securities (CMBS). With the current correction in the US housing market, these securities face the risk of price declines or defaults, posing a significant concern. Silicon Valley Bank's aggressive allocation for higher interest income has led to substantial risks, putting it in a precarious position in a bear market!

Note: MBS (Mortgage Backed Securities) are fixed income securities backed by real estate loans, and were the source of collateralized debt obligations described in the movie "The Big Short."

A Bold Move?

In its report, Silicon Valley Bank stated that on March 8, it sold almost all available-for-sale (AFS) securities, recognizing a one-time loss of $1.8 billion, but will reinvest the proceeds in short-term investments and increase term loans from $15 billion to $30 billion.

It's worth noting that although gains or losses on hold-to-maturity (HTM) securities are not recognized in the income statement, they still need to be marked. As of the end of 2022, Silicon Valley Bank had unrealized losses of up to $15.1 billion on HTM securities, not far from its $16 billion in shareholders' equity!

Note: AFS and HTM securities are accounted for differently based on their intended holding classification. AFS (Available for Sale) securities are typically intended for future sale and are required to be measured at fair value, appearing in the income statement; while HTM (Hold to Maturity) securities are usually long-term investments expected to be held until maturity, with changes in value not affecting the income statement.

Silicon Valley Bank mentioned that due to "expectations of continued rising interest rates, market pressures, and higher cash consumption levels by customers in investment operations," it decided to sell off long-term bonds in AFS, converting them into short-term bonds. Is this a bold move or too late to act?

All Transfers Suspended

Following a 60% plunge yesterday, Silicon Valley Bank's stock price continued to drop by 71% in pre-market trading today. According to industry sources in the US, other banks have issued instructions to suspend all transfers to Silicon Valley Bank. The future of Silicon Valley Bank seems to be a cause for serious concern!