America’s Silicon Valley Bank (SVB), one of the most prolific lenders in the private market ecosystem, has been embroiled in a major crisis.
SVB Financial Group bonds plunged alongside its shares after the company moved to shore up capital after losses on its securities portfolio and a slowdown in funding. Several experts have compared the current SVB crisis with Lehman Brothers and Evergrande’s liquidity crisis.
Moody’s, which has downgraded the rating of the Silicon Valley Bank, said that rising interest rates, increased macroeconomic uncertainty, venture capital investment activity, and high cash burn among SVB’s clients have created challenging conditions for the firm.
All you need to know about Silicon Valley Bank financial crisis:
To understand what has happened with America’s largest lender, it is important to look at the sound balance sheet and the growth of SVB. Silicon Valley Bank (SVB), a subsidiary of SVB Financial Group is one of the important lenders for early-stage businesses.
As per the report by Fortune.com, the 40-year-old bank has a relationship with more than 50% of all venture-backed companies in the US. Venture or private equity funds make up approximately 56% of the bank’s global banking portfolio in 2022.
SVB balance sheet: SVB’s financial profile benefits from an abundance of client funds, which includes on-balance sheet deposits and off-balance sheet client investment funds. Its average client funds were at a high at $348 billion in Q4 2022.
Last year, the lender increased its Federal Home Loan bank borrowing in the second half of 2022, which resulted in a market funds/tangible banking asset ratio of 9.1% as of 31 December 2022, whereas historically this ratio was very low. The bank’s net interest margin (NIM) declined to 2.0% for Q4 2022 and a 13% linked-quarter decline in net interest income.
How did the crisis begin?
In 2021, SVB saw a mass influx in deposits, which jumped from $61.76 billion at the end of 2019 to $189.20 billion at the end of 2021.
As deposits grew, SVB could not grow its loan book fast enough to generate the yield it wanted to see on this capital.
Therefore, the bank purchased a large amount (over $80 billion) in mortgage-backed securities (MBS) with these deposits for their hold-to-maturity (HTM) portfolio. Almost 97% of these MBS were 10+ years in duration, with a weighted average yield of 1.56%.
However, with the rise in Fed rates, the value of SVB’s MBS plummeted. This is because investors can now purchase long-duration “risk-free” bonds from the Fed at a 2.5x higher yield. Precisely, with the rising US Fed interest rates, the value of existing bonds with lower payouts fell in value.
Moody’s downgrades SVB’s rating: Moody’s Investors Service cut the bank’s issuer ratings following the moves. The downgrade “reflects the deterioration in the bank’s funding, liquidity and profitability, which prompted SVB to announce actions to restructure its balance sheet,” Moody’s said.