Silicon Valley Bank: A brief update

1. Shares of Silicon Valley Bank (SVB) plummeted 60 percent yesterday after the company announced a series of strategic actions to change its balance sheet structure while launching a $2.5bn total capital increase.
2. SVB has some peculiarities. The bank’s main clientele are California tech start-ups (which then use the bank to deposit funds received from venture capitalists). SVB has thus grown significantly in recent years, expanding the size of its liabilities (deposits have more than tripled in the past 4 years, from $55bn to $186bbn).
3. However, the sensitivity of SVB’s assets to increases in interest rates has been structurally lower than that of its liabilities, so the bank is seeing an inflation in the cost of deposits (on the liabilities side) on the one hand, not offset by an increase in profitability of assets. In the March 9 statement, the bank’s management warned that it “expects interest rates to continue to rise, Venture Capital markets to continue to be under pressure, and customers to burn cash.”

4. Therefore, SVB is trying to change its asset structure to make it more flexible if rates rise. How? SVB sold about $21bn of US Treasury and Agency securities (average yield of 1.79%), to buy short-term US-Treasury bonds at higher rates (about 5%), thus recording a loss of about $1.8bn. To cover the loss, the bank then launched a $2.5bn total capital.
5. This move underscores how recent rate hike policies have exacerbated the fragility of certain market segments, causing losses to crystallize by having to value mark-to-market assets.

6. In summary, Silicon Valley Bank shows a number of peculiarities:

– It is a regional bank with a specific clientels (start-ups, venture capital, California tech, which is penalized by the current market environment)

– It has a particular balance sheet structure (high percentage of business deposits with high sensitivity to rate increases , but low relative to its assets);

7. After losing 60% yesterday, the stock is losing about 60 percent today in pre-market in the wake of fears related to the possibility that customers may decide to withdraw deposits at the bank triggering a liquidity crisis. The fears were heightened after the Founders Fund, Peter Thiel’s Venture Capital, recommended withdrawing money from the bank’s accounts.
8. We are closely monitoring the development of the situation, although the contagion risk for large US banks would seem limited, but regional/smaller banks may show greater vulnerabilities.
9. In Europe, banks are highly regulated entities by European institutions, and banking fundamentals are solid, as confirmed by the latest quarterly reports recently released. Today’s event does not change the positive assessment of the sector’s solidity both from an equity perspective and with regard to subordinated bank bonds.
10. In U.S., it will be interesting to assess the Fed’s next moves: on the one hand, further tightening could exacerbate the risk of a systemic event; on the other hand, a slowdown in tightening could be interpreted as a symptom of some fragility in the U.S. financial sector.