![]() ![]() ![]() Did SVB have interest rate hedges? No it didn’t. ![]() And for that reason there is a big market in interest rate hedges. Of course, SVB were not the only ones in this position. So if they had to sell their “safe” portfolio of bonds they would actually suffer a huge loss. At a rough guess SVB suffered at least a $1bn loss on its books every time interest rates went up by 25 basis points and the Fed has hiked by 450. Why? Because bond prices go down as prevailing interest rates go up. The Fed hiked rates, bonds suffered their worst year in history. Then came the great inflation scare of 2022. SVB’s bonds looked like a safe piggybank. The question is what price do you sell it at and will you suffer a loss? In 2021 interest rates were still low and bond prices were high. so we looked at that and were more cautious.” That decision also created a “stone anchor” on SVB’s profitability, said Oppenheimer research analyst Christopher Kotowski, and it had left the bank vulnerable to changing interest rates.Ī portfolio of government backed bonds will be something you can sell. ![]() “In 2021 we sat back and said valuations and the amount of money being raised is clearly at epic levels . . . Becker said the “conservative” investments were part of a plan to shore up the bank’s balance sheet in case venture funding of start-ups went into freefall. At the time, the bank piled much of its customer deposits into long-dated mortgage-backed securities issued by US government agencies, effectively locking away half of its assets for the next decade in safe investments that earn, by today’s standards, little income. As the FT reported already in late February.Īt the peak of the tech investing boom in 2021, customer deposits surged from $102bn to $189bn, leaving the bank awash in “excess liquidity”. SVB adopted this strategy precisely in the hope of always having the cash on hand it needed to meet any cash withdrawals from its large depositors. Did it engage in adventurous financial engineering? No! A large part of its depositors’ money was invested in what is supposed to be the safest part of the financial system, Treasuries and government-backed bonds like agency-backed Mortgage Backed Securities. What pushed it over the edge?ĭid SVB make speculative loans? Yes, some. So SVB was a big accident waiting to happen. Some companies put their money in SVB because they also borrowed money from SVB, and keeping their money in SVB was a condition of their loan ! For others, it was a matter of convenience, since SVB also provided various financial services to the founders themselves. If you’re a startup founder, why would you stash your cash in a small, weird bank like SVB instead of a big safe bank like JP Morgan Chase, or in T-bills? This is actually the biggest mystery of this whole situation. And many of them stuck it in accounts at Silicon Valley Bank. And in the meantime, while they’re waiting to use that cash, they have to stick it somewhere. Startups don’t typically have a lot of revenue - they pay their employees and pay other bills out of the cash they raise by selling equity to VCs. Why did SVB have so many uninsured deposits? Because most of its deposits were from startups. At SVB at the end of 2022 only 2.7 percent of deposits were covered by FDIC insurance! As Noah Smith explains: ![]()
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