Nutt: Silicon Valley Bank – How could a phone call go so wrong?

Let’s talk about the extremely quick turn of events that caused Silicon Valley Bank to be closed by regulators. This failure was nothing like what happened to the banking industry during the Great Recession that resulted in 465 banks failing between 2008-2012.

Let’s unpack the chain of events. Late Wednesday March 8, SVB announced they were attempting to raise about $2 billion in capital while at the same time selling their entire bond investment portfolio at a $1.8 billion loss in an effort to gain additional liquidity (cash) that could be used for lending and other operations. Liquidity had been in decline due to the large amount of struggling start up technology companies and technology focused venture capitalist firms that made up SVB’s niche customer base. (A venture capitalist is a private equity investor or firm that invest in start-up or new companies with high growth potential in exchange for an equity stake) SVB attempted to raise capital to offset the loss and shore up their balance sheet and add roughly $1.8 billion in liquidity. SVB also reported a large mid-quarter improvement to their net interest income to indicate that their balance sheet mix was improving their earnings and taking a loss that could be made up in future earnings. SVB CEO, Greg Becker held a call with clients informing them that their assets were safe, and the bank had ample liquidity but also told them the only challenge would come if all the clients start telling each other that SVB is in trouble. The CEO asked the venture capitalist clients to stay calm and stick with them like the bank had done with the VC’s and the clients of the VC’s. That message obviously didn’t work. The VC’s sent emails to those companies they had invested in and advised them to move all their money out of SVB. That ignited the run on the bank.

The capital raise was now off the table and by Friday morning the stock price was down over 80% for the week and trading was halted prior to the market opening. A few hours later the bank was closed by regulators!

The speed with which all this unfolded was unbelievable. There has been talk about the unrealized losses in SVB securities portfolio that the bank strategically decided to sell at a loss but in reality, a $2 billion hit to SVB earnings was not as significant as some might think. SVB had roughly $210 billion in assets, $13 billion in cash, and $15 billion in equity capital and 2022 net income of $3.4 billion with a return on assets of .70% and return on equity of 9.32%. The $2 billion loss was not what caused the failure. Bad messaging, risky strategic decisions, and a niche customer base may all have contributed to the problem, but this was no doubt a panic induced run on the bank fueled by misinformation that was completely unnecessary.

Over the weekend Signature Bank in New York had a similar story, as their stock price began to plummet and the fear associated with the failure of Silicon Valley Bank ignited a run on the bank fueled with social media hype. Signature Bank dealt heavily with crypto-centric customer base. Similar to Silicon Valley Bank, Signature bank had good performance making over $1.3 billion in net income in 2022 resulting in a 1.14% return on assets. One evident risk was that both of these banks had a very niche driven customer base, resulting in both banks having over 88% of their deposits above the FDIC’s $250,000 protection and had very little retail or community-based customers.

As of Monday March 13, the Fed has stated that both banks' depositors will be made whole. In the case of these two banks the resolution will not result in any depositor losing any of their deposits. In an effort to stop this scenario playing out on a large scale the Fed acted this weekend to create a new source of funding (at a cost) that would help banks that need liquidity to meet their needs without having to realize the unrealized losses in their bond portfolio.

It’s always a good idea to know your banker and your bank. A best practice is to do the due diligence by going to sources for bank ratings and bank financial reports, there are many reputable places to find that information. If you can’t find it go ask your banker, like most business developing a relationship with a trusted financial professional is important.

Steven S. Nutt, CPA is Executive Vice President/CFO of Community National Bank and Trust of Texas. He is a financial executive with almost 30 years of experience in financial institutions specializing in risk management, accounting and strategic planning. He is a licensed CPA with a masters degree in business management, guest speaker on financial topics at various financial conferences and podcasts and has contributed to several financial publications. He may reached at: snutt@mybanktx.com.