Becker said the bank has “ample liquidity” to support its clients “with one exception: If everybody is telling each other that SVB is in trouble, that will be a challenge.”
Pro tip: if you're CEO of a bank that's facing a bank run, don't tell the press that you'll be in trouble if everybody takes their money out.
I just received an email from one of our investors, sent to all portfolio companies, advising everyone to transfer all of their money out of SVB at 8:30am tomorrow morning.
Investment/VC funds are doing the same (we’re talking many, many billions of deposits lost in a span of a few days).
There is a chance SVB will freeze assets while they deal w liquidity crunch which may impact startup ability to pay bills, pay salaries, etc.
If you use SVB, transfer your money out now (as in Friday morning at 8:30am), even if it’s to your personal account while you set up a business account elsewhere.
This is a serious issue and may result in wide ranging damage to the entire tech industry.
SVB is the most commonly used bank by startups and investors. This isn’t media trying to hype a story for clicks, this is a real an major issue.
SVB is our bank, I got in touch with a member of the senior team there and got the following message to share. (My own interpretation is I'm comfortable and I'm not planning to pursue it further at the moment):
As you know, we are limited in what we can share until the transaction formally closes next week but in the meantime I’m attaching concise information on the strength of our business, based on our recent mid-quarter update and financial announcements.
Our Moody’s Deposit Rating is Prime
Our credit ratings are also investment grade
SVB took action this week designed to:
Strengthen our financial position
Enhance profitability
Improve financial flexibility now and in the future
Our financial position enables us to take these strategic actions
SVB is well-capitalized
Has a high-quality, liquid balance sheet
Peer-leading capital ratios
Even before these actions:
We had ample liquidity and flexibility to manage our liquidity position
SVB has one of the lowest loan-to-deposit ratios of any bank of our size
The improved cash liquidity, profitability and financial flexibility resulting from the actions we announced today will bolster our financial position and our ability to support clients through sustained market pressures.
In theory, a bank can borrow reserves from/via the Fed to fulfill redemption requests, so long as the Fed and other lenders in the financial system think the bank has a sound balance sheet (i.e., its assets, including the loans it has made, are truly worth more than its liabilities, including the deposit balances it owes to depositors). The Fed can never run out of money to lend; it creates it out of thin air to lend them as needed with the push of a button.
If a bank does get in trouble, it's usually because its balance sheet is not sound (i.e., assets are not really worth more than liabilities). In the case of SVB, a big portion of its assets are loans made to startups. Who knows how many of those loans are at risk of default in this environment? Simultaneously, many of SVB's depositors are also startups that at the moment can't raise more capital and thus have been withdrawing money from their bank accounts to fund their cash burn. I suspect SVB can't sell its doubtful loans, or use them as collateral, so it has been forced to sell high-quality long-duration assets purchased when rates were much lower, recognizing large losses.
They're not allowing approval of wires via SMS or their app, and no one is picking up the phone there and most numbers are fast busy. Smells deeply bad. I had an account at a bank that went under a few decades ago and it took a while for ... bofa? to pick up the pieces.
They're probably already in talks with one of the big guys to take them over.. They still got until Sunday to get regulatory approval and announce it so that they get liquidity on Monday.
SVB CEO to VCs: please don’t tell anyone to withdraw their money or we could be in trouble
VCs: [immediately texting after hearing the above from the CEO] attention all portfolio companies, SVB seems to be in trouble, don’t keep your money with them
I'm really curious why banks like this are popular in the first place. I get why startups would want to lend from them, but what is the advantage of parking cash in a "startup-focused" bank? The rest of the business is exciting/risky enough, wouldn't you want your banking to be as boring as possible?
Banks don't understand startups. Startups have no history and just appear out of thin air with millions of dollars in their bank account. And then they proceed to burn tens if not hundreds of thousands of dollars month on month until they die, or get flooded with more millions.
That's some weird stuff!!
A bank that understands this, knows it's not fraudulent, and makes it easy to withdraw, deposit, get credit cards, give loans/venture debt, has a competitive advantage in this niche but highly lucrative sector—given they can operate with the right risk controls.
To add to the other comments, SVB also courts startup founders for their private banking arm, and there, too, the benefit is that they actually understand startup founders.
Example: After our startup went up in flames in 2017 my wife and I (co-founders) got "regular jobs" with nice salaries. Some time later, we tried to refinance our mortgage with Chase. The banker at Chase was very happy to serve us right up until the point where he asked if we had more than 20% ownership stake in any company. I said, well, yes, technically we own 80% of our defunct startup. He then said he had to look at the startup's tax returns for the last two years. I was like... ok, that's weird, but sure. He then informed us that we did not quality for a loan because he had to consider our company's income along with our own, and our company had lost half a million dollars in its last year of operation, therefore he considered us to have lost half a million dollars.
I was like... "Do you even know what a C corp is?"
We ended up switching to SVB, which had no problem refinancing our mortgage.
(Fortunately our balance in that account today is within FDIC-insured limits...)
Well, just as an example SVB gave my startup a bank account and a no personal recourse credit card days after we'd formed the corporation. No way you'd get that from BofA.
They understand the startup ecosystem in a way that big banks don't. Now there's some competition from startup-focused banks like Brex and Mercury, but a five years ago SVB was one of the only games in town.
they provide services/incentivies specifically catered to startups and their needs (eg free checking, aws credits, payment processing APIs/etc)
and not unlike aws/stripe/etc they want to be the bank for small companies that grow into huge companies. startups are a good segment to target (eg like vc) because they might also turn into a large company with much more cash and more banking needs
People care about convenience of locations, ATMs, online experience, customer service, savings rate, (lack of) fees, rewards. The bank's underlying risk profile is irrelevant for the vast majority of customers. If you have <$250K in your account the money is safe either way.
Gives you access to the upside of the start up at a lower risk cost compared to VC. I assume you are talking about people who are supplying the capital for the bank.
Small depositors (under US$250K) can get paid off quickly if the FDIC takes over, but larger ones may have to wait until SVB's loans are sold off to other banks for cash.
The collapse of a solvent but illiquid bank is well worked out in the US. Here's a 60 Minutes episode where they got to cover the process.[1] It's not too bad for the customers, but it is really bad for bank management. The 60 minutes video shows the moment when the FDIC people show up and tell the CEO he's finished.
Shares just fell 60%, not this year, but today, which is the biggest drop I can think of.
This is after a $1.25B common stock offering in an attempt to shore up its cash reserves.
Keep in mind they are raising cash by selling equity with their shares at $100 when they were at $500 a less than a year ago.
That's pawn shop levels of selling. To say they are in trouble is like saying it would be tough to sell a house that is currently on fire.
Rumour was that SIVB got alot of the old SI deposits when it became clear that they were going bankrupt.
It looks like both SI and SIVB will go bankrupt due to the same two causes.
The one two punch of:
- loan duration mismatches(short term deposits bet against long term loans). More specifically to get some interest income you tend to have to either go to riskier assets, not an option for bank, or longer duration. Unfortunately this locks you into rates for a long term.
As everyone knows, rates have really gone up quickly in a short duration. This makes your long duration assets drop alot in value so you can't easily liquidate them to move to new higher paying assets.
Normally this would be fine as you can ride out the duration of your long term bets without losing money, except for the second issue below.
- and a deluge of withdrawals meaning you can't just ride out your long term loans.
The difference here is that while SI will go away, someone will probably buy SIVB. It's just that with FDIC only protecting the first $250,000 in deposits you don't want your corporate money at the bank. And you certainly don't want to wait for FDIC to step in and make you whole.
There is a potential third issue with SIVB in that as the bank of alot of silicon valley startups they hold a lot of warrants for those companies on their balance sheet. And those have really been written down alot lately. Stripe, a great company by most measures had its valuation cut in half according to a post from yesterday so you can imagine what the average startup's valuation is worth if strip is being cut in half.
SIVB got hit by a lot of different issues all at once but they all had the same root cause, large interest rate hikes in a quick timeframe.
The other commonality between SIVB an SI is that both banks heavily concentrated on one sector only, for SI it was crypto and for SIVB it was silicon valley. For each bank they ran into interest rate hikes at the same time that the sectors they relied on took a huge dive in value.
Re: your duration point, these loans can be sold, either on the open market or a private exchange.
Calling it a duration mismatch is a bit misleading. They took on duration risk and their loans lost value is more accurate. Otherwise they would just sell the loans (which they stated they did, but clearly it wasn’t enough thus the equity raise)
Is this not a function of awful risk management? They seemingly put an outrageous percentage of depositors money at risk buying long bonds which I’m sure seemed like the best “fail safe” option at the time not thinking that rates would keep climbing.
But if other banks don’t have such enormous amounts of money leveraged it seems possible this is a one off case. When rates get hiked as quickly as they have risks that were always there that nobody considered are made obvious.
This is what a US bank failure looks like.[1] This 2009 picture shows the CEO of a failed bank near Chicago at the moment the 80-person FDIC team has arrived to take over. He's being told that it is no longer his bank.
The bank re-opened for withdrawals the next day under FDIC control, and was later sold off to another bank.
Just to be clear for everyone: banks don't keep 100% deposits in a big vault, where a full-customer-withdrawal can and should be expected and permitted.
Banks even at their simplest "Main Street local level", need to keep, say, 15% or 20% of their deposited funds available, as determined centrally e.g. the Fed or the Bank of England.
The rest by design is to be lent out, that's how banks offer loans, mortgages etc.
So "we can't immediately return 40% or 60% or 80% of deposits" really isn't any kind of gotcha or big secret. No bank in the world can handle such a situation.
So: runs can and do happen, and are always a threat, and currently might be happening.
The question is: how to handle it in a grown up manner.
this is definitely happening (context series A founder from t1 VCs)
Every VC is talking to their portfolio companies right now about this. Text/slacks/emails. Half of them screaming panic telling founders to pull money out, the other half holding the line to stay strong
Most founders i know arent taking the risk and moving money...
Come on, fearmongering by a few internet trolls isn't going to change the outcome. If the bank fails, it was going to fail anyway. If it pulls through, it was going to anyway.
Daily reminder that bank runs wouldn't be a thing if we did duration matching, forbidding banks from borrowing short and lending long.
As always, the underlying problem in banking is that the banks are lying, telling two or more people they own the same dollar at the same point in time. If they locked deposits for a period of time they could safely (and morally) loan that money out without lying, and, in fact, there wouldn't need to be a reserve ratio at all.
Demand deposits should cost a low service fee, since the money can't be safely lent.
It was specific at Silvergate too. Unfortunately there are far too many optimists out there managing money who chose not to play it safe. Thus, despite being idiosyncratic, it can still be a systemic problem
Why these companies didn’t issue shares at the outrageous/nosebleed valuations they were at a year ago? Truly a mystery
Okay so every bank faces the same vulnerability, which is that their bond portfolio has suffered major losses
The market was made aware of how deep the losses are, as this is not usually reported in investor disclosures and the bonds are usually held to maturity thereby not being subject to losses in their notional value
ANY bank with volatility in customer deposits is vulnerable to these losses as they have to sell the bond at its current value at a big loss to cover the customer withdrawal
This is systemic and a direct result of the tightening. Money is literally disappearing from pockets right now. This will continue until the fed eases its policy.
Been using Mercury for a couple of years, as a customer I can recommend their excellent support & services. That said, I know aprox zero of their balance sheet or those of their backing banks Choice Financial Group and Evolve Bank & Trust.
The higher central bank interest rates is affecting Future discounted cash flow and valuations startups. I wrote a blog entry about it last year where I predicted a lot of non profitable startups would be effected about it.
The king without clothes fairy tale of startup unicorns is starting to hit reality of financing capital at high interest rates.
Many startups have not had sound viable business models which yields black profit numbers but have instead run on red minus numbers year after year. Due to very low interest rates it has been too easy to start new companies. Thus many startups have been started without viable business ideas. The startups have been funded by venture capital, venture capital have calculated on future discounted cash flow when valuing the investments. Now that central banks are raising interest rates to fight inflation the higher interest rate will effect venture capital firms calculations. Venture capital uses future discounted cash flow. Now central banks artifically altered the interest rates by quantive easing which forced interest rates lower than the natural market yield.
“Application
To apply the method, all future cash flows are estimated and discounted by using cost of capital to give their present values (PVs). The sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value of the cash flows in question;[[1]](https://en.wikipedia.org/wiki/Discounted_cash_flow#cite_note...) see below.”
[+] [-] rippercushions|3 years ago|reply
Becker said the bank has “ample liquidity” to support its clients “with one exception: If everybody is telling each other that SVB is in trouble, that will be a challenge.”
Pro tip: if you're CEO of a bank that's facing a bank run, don't tell the press that you'll be in trouble if everybody takes their money out.
[+] [-] cj|3 years ago|reply
Investment/VC funds are doing the same (we’re talking many, many billions of deposits lost in a span of a few days).
There is a chance SVB will freeze assets while they deal w liquidity crunch which may impact startup ability to pay bills, pay salaries, etc.
If you use SVB, transfer your money out now (as in Friday morning at 8:30am), even if it’s to your personal account while you set up a business account elsewhere.
This is a serious issue and may result in wide ranging damage to the entire tech industry.
SVB is the most commonly used bank by startups and investors. This isn’t media trying to hype a story for clicks, this is a real an major issue.
[+] [-] tito|3 years ago|reply
As you know, we are limited in what we can share until the transaction formally closes next week but in the meantime I’m attaching concise information on the strength of our business, based on our recent mid-quarter update and financial announcements.
Our Moody’s Deposit Rating is Prime
Our credit ratings are also investment grade
SVB took action this week designed to:
Strengthen our financial position Enhance profitability Improve financial flexibility now and in the future
Our financial position enables us to take these strategic actions
SVB is well-capitalized Has a high-quality, liquid balance sheet Peer-leading capital ratios
Even before these actions:
We had ample liquidity and flexibility to manage our liquidity position SVB has one of the lowest loan-to-deposit ratios of any bank of our size
The improved cash liquidity, profitability and financial flexibility resulting from the actions we announced today will bolster our financial position and our ability to support clients through sustained market pressures.
[+] [-] cs702|3 years ago|reply
If a bank does get in trouble, it's usually because its balance sheet is not sound (i.e., assets are not really worth more than liabilities). In the case of SVB, a big portion of its assets are loans made to startups. Who knows how many of those loans are at risk of default in this environment? Simultaneously, many of SVB's depositors are also startups that at the moment can't raise more capital and thus have been withdrawing money from their bank accounts to fund their cash burn. I suspect SVB can't sell its doubtful loans, or use them as collateral, so it has been forced to sell high-quality long-duration assets purchased when rates were much lower, recognizing large losses.
[+] [-] cdibona|3 years ago|reply
[+] [-] pera|3 years ago|reply
[+] [-] dx034|3 years ago|reply
[+] [-] nico|3 years ago|reply
VCs: [immediately texting after hearing the above from the CEO] attention all portfolio companies, SVB seems to be in trouble, don’t keep your money with them
[+] [-] raincom|3 years ago|reply
[+] [-] zht|3 years ago|reply
[+] [-] ericpauley|3 years ago|reply
[+] [-] helsontaveras18|3 years ago|reply
That's some weird stuff!!
A bank that understands this, knows it's not fraudulent, and makes it easy to withdraw, deposit, get credit cards, give loans/venture debt, has a competitive advantage in this niche but highly lucrative sector—given they can operate with the right risk controls.
[+] [-] kentonv|3 years ago|reply
Example: After our startup went up in flames in 2017 my wife and I (co-founders) got "regular jobs" with nice salaries. Some time later, we tried to refinance our mortgage with Chase. The banker at Chase was very happy to serve us right up until the point where he asked if we had more than 20% ownership stake in any company. I said, well, yes, technically we own 80% of our defunct startup. He then said he had to look at the startup's tax returns for the last two years. I was like... ok, that's weird, but sure. He then informed us that we did not quality for a loan because he had to consider our company's income along with our own, and our company had lost half a million dollars in its last year of operation, therefore he considered us to have lost half a million dollars.
I was like... "Do you even know what a C corp is?"
We ended up switching to SVB, which had no problem refinancing our mortgage.
(Fortunately our balance in that account today is within FDIC-insured limits...)
[+] [-] necubi|3 years ago|reply
They understand the startup ecosystem in a way that big banks don't. Now there's some competition from startup-focused banks like Brex and Mercury, but a five years ago SVB was one of the only games in town.
[+] [-] ttobbaybbob|3 years ago|reply
and not unlike aws/stripe/etc they want to be the bank for small companies that grow into huge companies. startups are a good segment to target (eg like vc) because they might also turn into a large company with much more cash and more banking needs
[+] [-] paxys|3 years ago|reply
[+] [-] boringg|3 years ago|reply
[+] [-] Animats|3 years ago|reply
The collapse of a solvent but illiquid bank is well worked out in the US. Here's a 60 Minutes episode where they got to cover the process.[1] It's not too bad for the customers, but it is really bad for bank management. The 60 minutes video shows the moment when the FDIC people show up and tell the CEO he's finished.
[1] https://www.youtube.com/watch?v=TAE8i40A5uI
[+] [-] kesor|3 years ago|reply
[+] [-] chollida1|3 years ago|reply
This is after a $1.25B common stock offering in an attempt to shore up its cash reserves.
Keep in mind they are raising cash by selling equity with their shares at $100 when they were at $500 a less than a year ago.
That's pawn shop levels of selling. To say they are in trouble is like saying it would be tough to sell a house that is currently on fire.
Rumour was that SIVB got alot of the old SI deposits when it became clear that they were going bankrupt.
It looks like both SI and SIVB will go bankrupt due to the same two causes.
The one two punch of:
- loan duration mismatches(short term deposits bet against long term loans). More specifically to get some interest income you tend to have to either go to riskier assets, not an option for bank, or longer duration. Unfortunately this locks you into rates for a long term.
As everyone knows, rates have really gone up quickly in a short duration. This makes your long duration assets drop alot in value so you can't easily liquidate them to move to new higher paying assets.
Normally this would be fine as you can ride out the duration of your long term bets without losing money, except for the second issue below.
- and a deluge of withdrawals meaning you can't just ride out your long term loans.
The difference here is that while SI will go away, someone will probably buy SIVB. It's just that with FDIC only protecting the first $250,000 in deposits you don't want your corporate money at the bank. And you certainly don't want to wait for FDIC to step in and make you whole.
There is a potential third issue with SIVB in that as the bank of alot of silicon valley startups they hold a lot of warrants for those companies on their balance sheet. And those have really been written down alot lately. Stripe, a great company by most measures had its valuation cut in half according to a post from yesterday so you can imagine what the average startup's valuation is worth if strip is being cut in half.
SIVB got hit by a lot of different issues all at once but they all had the same root cause, large interest rate hikes in a quick timeframe.
The other commonality between SIVB an SI is that both banks heavily concentrated on one sector only, for SI it was crypto and for SIVB it was silicon valley. For each bank they ran into interest rate hikes at the same time that the sectors they relied on took a huge dive in value.
Diversification is important.
[+] [-] supernova87a|3 years ago|reply
"Motivated seller!" -- Lionel Hutz
[+] [-] adam_arthur|3 years ago|reply
Calling it a duration mismatch is a bit misleading. They took on duration risk and their loans lost value is more accurate. Otherwise they would just sell the loans (which they stated they did, but clearly it wasn’t enough thus the equity raise)
[+] [-] dkrich|3 years ago|reply
But if other banks don’t have such enormous amounts of money leveraged it seems possible this is a one off case. When rates get hiked as quickly as they have risks that were always there that nobody considered are made obvious.
[+] [-] EVa5I7bHFq9mnYK|3 years ago|reply
That conjecture seems wrong. Sure, 2% 30-y treasuries dropped a lot in value, but you still can easily liquidate them.
[+] [-] Animats|3 years ago|reply
The bank re-opened for withdrawals the next day under FDIC control, and was later sold off to another bank.
[1] https://i.postimg.cc/zGQNQmmf/bankfailed.jpg
[+] [-] brianmcc|3 years ago|reply
Banks even at their simplest "Main Street local level", need to keep, say, 15% or 20% of their deposited funds available, as determined centrally e.g. the Fed or the Bank of England.
The rest by design is to be lent out, that's how banks offer loans, mortgages etc.
So "we can't immediately return 40% or 60% or 80% of deposits" really isn't any kind of gotcha or big secret. No bank in the world can handle such a situation.
So: runs can and do happen, and are always a threat, and currently might be happening.
The question is: how to handle it in a grown up manner.
[+] [-] exhibitapp|3 years ago|reply
Every VC is talking to their portfolio companies right now about this. Text/slacks/emails. Half of them screaming panic telling founders to pull money out, the other half holding the line to stay strong
Most founders i know arent taking the risk and moving money...
[+] [-] vonnik|3 years ago|reply
There are a lot of harmful clowns out there fearmongering. They should stop.
The failure of a bank like this, if it occurs, would be bad for a lot of people.
[+] [-] justinzollars|3 years ago|reply
[+] [-] phendrenad2|3 years ago|reply
[+] [-] taytus|3 years ago|reply
Not even once, they have done something for us.
[+] [-] recursivedoubts|3 years ago|reply
As always, the underlying problem in banking is that the banks are lying, telling two or more people they own the same dollar at the same point in time. If they locked deposits for a period of time they could safely (and morally) loan that money out without lying, and, in fact, there wouldn't need to be a reserve ratio at all.
Demand deposits should cost a low service fee, since the money can't be safely lent.
Yes, I'm a lot of fun at parties, why do you ask?
[+] [-] carom|3 years ago|reply
1. https://techcrunch.com/2023/03/09/silicon-valley-bank-firms-...
[+] [-] adam_arthur|3 years ago|reply
Why these companies didn’t issue shares at the outrageous/nosebleed valuations they were at a year ago? Truly a mystery
[+] [-] marcosdumay|3 years ago|reply
[+] [-] yieldcrv|3 years ago|reply
The market was made aware of how deep the losses are, as this is not usually reported in investor disclosures and the bonds are usually held to maturity thereby not being subject to losses in their notional value
ANY bank with volatility in customer deposits is vulnerable to these losses as they have to sell the bond at its current value at a big loss to cover the customer withdrawal
[+] [-] johnbellone|3 years ago|reply
Today I learned that many startups park their money at one bank. I hope that isn’t true. If it is I’d be moving my funds regardless right now.
[+] [-] csomar|3 years ago|reply
[+] [-] unknown|3 years ago|reply
[deleted]
[+] [-] _blz2|3 years ago|reply
[+] [-] zenmacro|3 years ago|reply
Two of the largest bank ETFs are down around ~8% today. SIVB is only 2% of the holdings of KBE and 3% of KBWB.
https://www.google.com/finance/quote/KBE:NYSEARCA
https://www.google.com/finance/quote/KBWB:NASDAQ
A former Bridgewater guy who I respect very much is saying that the panic is totally uncalled for: https://mobile.twitter.com/BobEUnlimited/status/163395659942...
[+] [-] toss1|3 years ago|reply
Been using Mercury for a couple of years, as a customer I can recommend their excellent support & services. That said, I know aprox zero of their balance sheet or those of their backing banks Choice Financial Group and Evolve Bank & Trust.
[+] [-] roseway4|3 years ago|reply
https://techcrunch.com/2023/03/09/silicon-valley-bank-shoots...
[+] [-] acd|3 years ago|reply
The king without clothes fairy tale of startup unicorns is starting to hit reality of financing capital at high interest rates.
Many startups have not had sound viable business models which yields black profit numbers but have instead run on red minus numbers year after year. Due to very low interest rates it has been too easy to start new companies. Thus many startups have been started without viable business ideas. The startups have been funded by venture capital, venture capital have calculated on future discounted cash flow when valuing the investments. Now that central banks are raising interest rates to fight inflation the higher interest rate will effect venture capital firms calculations. Venture capital uses future discounted cash flow. Now central banks artifically altered the interest rates by quantive easing which forced interest rates lower than the natural market yield.
“Application
To apply the method, all future cash flows are estimated and discounted by using cost of capital to give their present values (PVs). The sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value of the cash flows in question;[[1]](https://en.wikipedia.org/wiki/Discounted_cash_flow#cite_note...) see below.”
source: https://en.wikipedia.org/wiki/Discounted_cash_flow
According to the investopedia article four values are among other used to value startups:
* Cost-to-Duplicate
* Market Multiple
* Discounted Cash Flow (DCF)
* Valuation by Stage.
source: https://www.investopedia.com/articles/financial-theory/11/va...
[+] [-] kyleblarson|3 years ago|reply