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Forbes had highlighted SVB for the 5th year in a row as one of America’s Best Banks

March 15, 2023

The Major Markets fell once again last week as the market dealt with the news of a bank run. All five indices fell substantially with the Nasdaq seeing the greatest losses. The S&P 500 was not far behind with a loss just over 4.5%. By now, most casual market observers have heard the name of Silicon Valley Bank. As others have highlighted, it is amazing how quickly the fall from grace took place. Just two weeks earlier, Forbes had highlighted the bank for the 5th year in a row as one of America’s Best Banks. In this bank’s case, the cause of the decline centered around liquidity. On March 8th, Moody’s, which is one of the top financial ratings agencies in the world, downgraded the ratings of the bank and its holding company due to “deterioration in the bank's funding, liquidity and profitability, which prompted SVB to announce actions to restructure its balance sheet.” The biggest issue that impacted SVB was not bad loans, like what led to the 2008 bailouts, but rather the ever-increasing interest rates caused by the Fed. SVB had $161B in customer deposits as of the end of last year according to regulatory filings. This fell modestly from the $175B year end of 2021. But still significantly higher than the $95B at the end of 2020. But over that time period interest rates rose. SVB invested deposits into long term, low-risk government bonds as well as other assets to pay for operations and provide returns. Ironically, it was the investment in low-risk bonds relative to the venture capital exposure that proved the greater issue in this case. As interest rates rose, the value of the bonds on the books fell. Moreover, the Silicon Valley tech companies that marked the niche for this bank began to pull more cash from their accounts than what they were putting in, draining overall liquidity from the bank as a whole. In the end, there were not enough liquid assets on hand to match the demand of the deposits, creating the run that we saw take place.