By: Antoine del Sordo
The sudden collapse and closure of Silicon Valley Bank (SVB), deemed the second-largest bank failure in U.S. history, can be attributed to a broad array of factors. This article, that will be comprised of two parts, aims to analyze this event delving deeper into the key factors that contributed to SVB’s collapse. This first delivery will be centered in analyzing the liquidity risk management and deposit concentration from a corporate finance perspective.
SVB was a corporation organized under the laws of the State of California that served as the principal subsidiary of Silicon Valley Bank Financial Group (SVBFG). Prior to its failure, SVB furnished private banking products and services to clients predominantly in the technology and lifescience-healthcare sectors proffering an array of credit solutions to both emerging and established companies, with an emphasis on engaging start-up companies as clients and retaining them as they expanded.1 This earned SVBFG to be recognized as the preeminent financial institution for Silicon Valley technology start-ups. Nevertheless, certain recent financial decisions affected the liquidity of SVB, which played as a key factor for its collapse.
Foremost, it is important to note that, liquidity risk is an inherent aspect of banking, as financial institutions serve as credit intermediaries by collecting shortterm deposits and disbursing long-term funds. This process, known as maturity transformation, involves liquidity risks as depositors may seek to withdraw their funds within a timeframe that does not align with the banking institution’s investment of those funds.2 In the case of SVB, it relied on a large and concentrated deposit. However, when depositor confidence on SVB was lost due to various indicators and news reports 3 that informed on its lack of investment diversification, its high degree of concentration of depositors and its commitment to illiquid long-term investments, SVB was unable to satisfy the withdrawal requests that increased dramatically in March 2023.4
In particular regarding the highly concentrated deposit base, the 2022 balance sheet of SVBFG shows that deposit accounts with a valuation surpassing $250,000.00 dollars represented the 89.38%5 of the total deposits received by SVB, and that the profile of the holders of such accounts mainly corresponded to venture capital backed entities which were likely to know each other due to their specific profile, thereby amplifying the risk of a bank run.6
Although in periods of high growth rates, particularly for venture capital firms, the risk of SBV to become illiquid appeared to be mitigated due to SBV’s assets growth rate of 271% from 2018 to 2021, consequently holding SVBFG as of December 31, 2022, $212 billion in total assets, of which $209 billion were managed by SVB.7
A large portion of such assets was invested in long term-low risk investment instruments, which appeared to be a reasonable decision as long as the high growth rate of assets continued. Nevertheless, when in the second half of 2022, venture capital backed companies experienced a substantial slowdown due to concerns about a recession in the US and global inflation, the assets growth (including deposits) had an abrupt slow down and cash withdrawals by companies began to rise to maintain their operations. This caused that SVB experienced a liquidity shortage, which was exacerbated by the events of March 2023 when on March 9, SVB experienced a total deposit outflow of $42 billion dollars8 and anticipated an additional outflow exceeding $100 billion dollars on March 10, with a negative cash balance of approximately $958 million dollars at the close of business on March 9.9
Likewise, SVB’s strategic financial decision of investing in long term low risk investment instruments was not appropriate due to the risk profile of its specific depositors’ base, which as mentioned, primarily consisted of a small group of venture capitalists, because it significantly limited SVB’s ability to respond effectively to changing market conditions. Consequently, when SVB’s deposits began to decrease in the second quarter of 2022 and the first quarter of 2023 at the time venture capital backed clients were withdrawing their balances, there was an insufficient ‘balance of highly liquid assets that could be readily sold or monetized’10. As a result, in conjunction with the shocks suffered from the increase in interest rates and the substantial number of withdrawals from concentrated depositors in March 2023, SVB was unable to meet depositors’ withdrawal requests and was declared insolvent by the California Department of Financial Protection and Innovation.
Based upon the foregoing, it may be concluded that SVB’s financial performance in the years leading up to its failure reveals that, despite significant growth in its assets from 2018 to 2022 driven by a surge in deposits during a period of high liquidity, the bank’s deposit base was heavily concentrated within a limited group of depositors. These depositors, primarily venture capital backed companies, were particularly sensitive to the economic slowdown experienced in the latter half of 2022, which resulted in a decrease in deposits and, coupled with the impact of rising interest rates (that will be deeper analyzed in the second delivery of this article), a substantial number of withdrawals from concentrated depositors in March 2023, and large portion of assets placed in long term-low risk investment products, led to SVB’s inability to meet withdrawal requests and to its eventual insolvency.
1 US Securities and Exchange Commission (SEC) SVBFG Form 10-K (December 2022) 32-33.
2 Ferran, E. and Look CL, Principles of Corporate Finance Law (OUP 2014) 274.
3 Kinder, T. and others, 'Silicon Valley Bank profit squeeze in tech downturn attracts short sellers' Financial Times (21 February 2023) accessed June 20, 2023.
4 California Department of Financial Protection and Innovation, 'Order Taking Possession of Property and Business of SVB' (10 March 2023).BGFRS (n 4) 51.
5 Lai, VV and Huong, TT, From Hero to Zero-The Case of SVB (SSRN 7 April 2023) 12.
6 Rubinstein, M. 'The Demise of SVB' Net Interest (10 March 2023) accessed June 20, 2023.
7 Board of Governors of the Federal Reserve System (BGFRS), Review of the Federal Reserve's Supervision and Regulation (April 28, 2023) 17.
8 California Department of Financial Protection and Innovation, 'Order Taking Possession of Property and Business of SVB' (10 March 2023).
9 Board of Governors of the Federal Reserve System (BGFRS), Review of the Federal Reserve's Supervision and Regulation (28 April 2023) 56.
10 California Department of Financial Protection and Innovation, 'Order Taking Possession of Property and Business of SVB' (10 March 2023).
