From: allin
On March 10, 2023, Silicon Valley Bank (SVB) was taken over by the FDIC, marking an emergency event in Silicon Valley and the broader financial system [00:00:48]. This event is considered by some to be a “Black Swan like event” not seen since 2008 [00:01:23].
Context and Scale of the Collapse
The implosion of Silicon Valley Bank occurred over approximately 36 hours, leading the FDIC to shut it down [00:01:58]. The situation felt as “acute or insane or intense” as the 2008 financial crisis or the COVID-19 pandemic, potentially worse from a Silicon Valley perspective [00:02:27]. This event is likened to a “Lehman sized event for Silicon Valley” [00:03:14].
SVB was a key part of the financial plumbing of Silicon Valley, with billions of dollars in deposits frozen, meaning companies could not pay bills, access funds, or meet payroll [00:07:07]. The bank was used by 50% of venture-backed startups and the majority of venture firms [00:06:03].
Impact on the Startup Ecosystem
The collapse of SVB has two major impacts:
- Startup Ecosystem Peril Thousands of companies may be unable to make payroll in the coming weeks due to their funds being trapped at SVB, which is now under receivership [00:03:40]. Many who wired money out managed to do so, but others had wires frozen or couldn’t log in [00:03:52]. This is not “Big Tech” at risk, but rather small companies with 10 to 100 employees, potentially thousands of them being “wiped out for no reason” [00:04:27]. These are considered “little Tech,” the future companies that maintain U.S. competitiveness [00:04:52]. This situation has been termed an “extinction level event” for the startup economy [00:04:21, 00:52:54].
- Venture Capital Firms Affected Venture firms also had money tied up at SVB, unable to access millions to invest in startups [00:06:08, 01:01:16]. SVB also provided white-glove services like mortgages for venture capitalists and founders, and loans to General Partners (GPs) of venture firms [00:06:30, 00:06:39].
Regional Banking Crisis and Contagion
The second major impact is a potential regional banking crisis [00:05:04]. Depositors, seeing that money was not safe at SVB (a top 20 bank that was, as far as known, in regulatory compliance), are now asking why they would keep their money anywhere but a top four bank like JPMorgan [00:05:06, 00:52:03, 00:59:51]. This has led to concerns of a run on the regional banking system, similar to 2008 [00:05:44]. The iShares Regional Bank ETF showed a precipitous decay, indicating that the equity tier of regional banks is increasingly worried about being wiped out [01:17:41, 01:17:56].
The crisis has trickling effects beyond Silicon Valley, impacting payment processing and payroll companies that stored capital and processed money through SVB [00:44:00]. Rippling, a payroll company, temporarily could not hit its payroll cycle due to money tied up at SVB, though they announced they had funds elsewhere [00:44:34].
Causes of the Collapse
The collapse was triggered by a combination of factors:
Balance Sheet Restructuring and Devaluation
On Wednesday evening (March 8, 2023), SVB’s CEO announced the bank was rebalancing its balance sheet by selling tens of billions of dollars of mostly U.S. treasuries [00:07:51]. They then announced a capital raise [00:08:05]. Shares in SVB, a publicly traded entity, dropped 60% on Thursday and another 60% on Friday [00:08:10].
SVB had 173 billion dollars of customer deposits and 22 billion of other debt, totaling about 195 billion in liabilities at the end of 2022 [00:09:39]. They had 208 billion in total assets, including 74 billion in loans, 91 billion in “hold to maturity” securities, and 26 billion in “available for sale” securities (mostly treasuries) [00:10:16].
Duration Mismatch and Interest Rate Hikes
SVB’s deposits grew rapidly, leading them to buy a large amount of long-duration Mortgage-Backed Securities (MBS) and treasuries [00:10:01, 00:11:06]. The problem was a duration mismatch: they bought 10-year risk to pay back money that could be called daily or weekly [00:20:37]. When interest rates rose rapidly (from 2% to 5% in a short period), the value of these long-dated bonds plummeted [00:13:01, 00:35:38]. While holding them to maturity would yield the full return, SVB needed to sell them early due to declining deposits, taking massive losses in the billions of dollars [00:35:46, 00:54:58].
Declining Deposits and Startup Burn
A key driver was the decline in deposits [00:12:49]. Venture capitalists were not investing new money, while startups continued burning cash at pre-market reset rates [00:12:34, 00:18:39]. This led to a mismatch, causing deposits to go down [00:12:49]. Many venture capitalists and founders did not heed warnings to cut burn and manage cash, accelerating the crisis [00:18:18, 00:28:10].
Venture Debt Portfolio Issues
SVB’s loan portfolio included 10% (7 billion dollars) in venture debt [00:14:32, 00:30:17]. Historically, venture debt relied on the assumption that VCs would continue funding companies [00:14:39, 00:24:47]. However, in a bear market where VCs stopped funding, this model broke down [00:25:01, 02:47:00]. SVB’s performance on venture debt warrants (equity upside from successful startups) collapsed in Q4 2022, from 148 million in 2022 [00:15:24, 00:15:47]. Concerns were raised about banks using customer deposits to fund risky venture debt, which lacks collateral and relies on VC commitments that may not exist [00:23:16, 00:25:01, 00:26:16].
Regulatory Oversight Failures
Critiques were leveled at regulators for allowing “crazy loopholes” in accounting treatment of assets and permitting duration mismatches [00:21:30, 00:53:00]. Specifically, the ability for banks to buy long-term bonds without recognizing losses until they are sold was questioned [00:22:46, 00:53:06]. It was highlighted that financial analyses had sniffed out SVB’s issues months prior, suggesting regulators should have intervened [00:13:57, 00:21:57].
The Bank Run
The cascade began when SVB’s CEO announced losses and a capital raise, causing its shares to drop [00:07:51]. This led venture capitalists to advise their founders to withdraw money from SVB, initiating a classic bank run [00:08:19, 00:08:27]. Within 24 hours, $42 billion in deposits were withdrawn, representing over 20% of total deposits [01:06:25, 01:07:04]. This outflow exceeded SVB’s cash on hand and liquid securities [01:07:11]. The speed of this “Silicon Valley 24-hour cycle” and its tightly intertwined network exacerbated the run, as the “herd mentality” drove everyone to withdraw money quickly [01:08:37, 01:09:58]. The decision to withdraw was seen as rational: zero downside to pulling money out, and upside of saving 100% of funds [01:10:52].
Proposed Solutions and Government Role
To prevent further contagion, an immediate and decisive action is required:
- Bear Hug Solution A “bear hug solution” offered this weekend where a larger entity takes over SVB, and the federal government guarantees 100% of deposits, is crucial [01:15:40, 01:16:55]. This would involve the Fed warehousing the risk, similar to the Troubled Asset Relief Program (TARP) in 2008 [00:41:48]. It’s argued this intervention might not even require actual money if the confidence is restored [01:17:09].
- Protecting Depositors, Not Executives The goal is to protect depositors, not to “bail out” the bank’s executives or stockholders, who should lose everything [00:49:56, 00:59:29]. The argument is that depositors assumed their money was safe in a top-20 compliant bank [00:59:08, 01:13:07].
- U.S. Taxpayer Benefit It is suggested that if the U.S. government steps in, it should get a piece of these companies (e.g., through warrants from the venture debt portfolio) to make it fair for taxpayers [00:49:42, 00:51:26]. TARP, for example, returned a profit to the American people [00:48:06]. A potential cost of $25-50 billion to cover SVB’s deposits is estimated, which is significantly less than TARP [00:48:12].
- FDIC Insurance Limits The current FDIC insurance limit of 25 million for business accounts, should be implemented, coupled with strict restrictions on how banks can invest these funds (only highly liquid, marked-to-market assets) [01:19:31, 01:19:37].
Broader Implications for Venture Capital
The impact on venture capital and investment is significant:
- Chilling Effect The uncertainty creates a chilling effect on the investment environment [01:01:31]. VC firms are now asking LPS for early capital calls to support existing portfolio companies whose cash is stuck [01:01:19, 01:01:47].
- Investment Freeze There is a potential for private markets and VC to “seize,” with a 60-day freeze on deal-making activity [01:02:20, 01:03:06]. VCs will likely focus on shoring up existing portfolios and saving “known winners” rather than making new investments [01:03:13, 01:04:05].
- Fund Shutdowns and Accelerated Failures Some VC funds may shut down, and companies that were already distressed will likely accelerate their shutdowns as no one will step in to bridge or fund them [01:02:53, 01:04:21].
- Shift to Risk Management This event highlights the importance of risk management in venture capital, which has been seen as less critical in a “lottery ticket” mentality [01:04:47, 01:05:02]. The crisis could lead to a market reset where risk management becomes “in vogue and cool” [01:05:47].
The crisis also touches China’s innovation economy, as SVB served as an on-ramp for U.S. and other investors to get money into Chinese startups [00:46:53].
Lessons Learned and Future Outlook
The event underscores that bank runs, while appearing as panic, are often rational decisions in a game theory scenario where confidence is lost [01:10:25, 01:10:40]. The banking system’s opacity, where assets are not marked to market daily, contributes to this by obscuring true exposure [00:53:27]. If the federal government does not act decisively, the “whole regional banking system can be decimated,” leading to a concentration of power in just four “too big to fail” banks [00:53:46, 00:59:54].
The next 48-72 hours are critical to resolve the crisis and prevent further cascading effects beyond payroll, such as impacts on mortgages or rents [00:46:00, 01:22:25].