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Buckling under the uncertainty!

By Bamboo In The Wind
Uncertainty is unnerving. It unsettles the balance. The tension it creates can be problematic in institutions, workplaces, or individuals. Take the example of the Silicon Valley Bank fiasco unfolding right now. 

Simplistically speaking - SVB bank, a leading start-up and VC fund bank, collected massive deposits post covid. Deposits went up from USD 60B in 2020 to over USD 200B by the end of 2022.

SVB Financials - a child arm of SVB Bank, invested a portion of deposits in Govt Bonds before Fed intervention with a series of base interest rates revision. Since Covid, Savings interest rates steadily rose to make Govt Bond's market value less attractive if they were to be sold for short-term needs.

To SVB bank's surprise, Bonds market values declined during the same period when Interest rates were rising. The vast cash deposits eroded as loads of start-ups that depended on doing well faced recessionary pressure and a slow-down, impacting product adoption and revenue uptick. This uncertain environment meant the start-ups were beginning to burn the cash faster, leading to SVB's deposits steadily declining in double-digit percentages!

This put pressure on SVB bank to manage fund outflows and to service new lending requests. 

And so, SVB bank announced that they planned to sell their security to support discharges and fund new lending requests. The news of the share sales led to share prices tanking and advisories from VC firms to its investment companies to take the deposits away from SVB bank.

One day after the advisory, the bank ran out of cash after companies rushed to take out cash worth USD 42B - about 25% of the bank's total deposits!

SVB bank is in a precarious situation with existing retail and business customers hugely concerned about their deposits. As a result, all account holders at the bank have now lost access to funds until further notice. There is a potential for the bank to default and create other cascading effects in its customer base and trust issues with Non-systemically important banks (Non-SIBs).

This, for sure, is an example of how SVB bank is buckling under the uncertainty arising out of poor short-term fund planning and poor long-term investment decisions under a poorly visible economy!

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