Investor concerns have intensified over the future of Silicon Valley Bank (SVB) following the bank’s announcement of a significant sale of assets and stocks to raise additional capital. The sale has raised doubts about the financial health of the tech startup and venture capital-focused bank, particularly in the wake of the recent closure of crypto bank Silvergate. The sale has led to a collapse of SVB’s shares by over 60%, wiping out roughly $80 billion in value.
As one of the largest banks in the United States, SVB offers banking services to prominent venture firms such as Sequoia and Andreessen Horowitz (a16z), which are known for their involvement in the crypto industry. The bank’s financial struggles have therefore led to concerns among crypto investors who rely on SVB’s services.
The drastic decline in SVB’s share value has raised questions about the bank’s ability to effectively manage its assets and maintain its reputation as a reliable banking partner for tech startups and venture capital firms. These concerns could have significant implications for the bank’s long-term viability and its ability to compete with other banks in the industry.
So, what happened?
SVB saw a significant increase in deposits from $61.76 billion at the end of 2019 to $189.20 billion at the end of 2021. However, as deposits grew, SVB struggled to grow their loan book quickly enough to generate the desired yield on the capital. To address this, they purchased over $80 billion in mortgage-backed securities (MBS) for their hold-to-maturity (HTM) portfolio, with 97% of the MBS having a 10+ year duration and a weighted average yield of 1.56%.
The problem arose as the Federal Reserve raised interest rates in 2022 and continued to do so in 2023, causing the value of SVB’s MBS to plummet. This is because investors can now purchase long-duration “risk-free” bonds from the Fed at a 2.5x higher yield, making SVB’s MBS less attractive.
While this is not a liquidity issue as long as SVB maintains their deposits, the bank announced yesterday that they had sold $21 billion of their Available for Sale (AFS) securities at a loss of $1.8 billion. Additionally, SVB is raising another $2.25 billion in equity and debt. This news came as a surprise to investors who believed that SVB had sufficient liquidity to avoid selling their AFS portfolio.
The decision to sell a portion of the AFS portfolio suggests that SVB is prioritizing liquidity over potential long-term gains from the securities. While this move may be seen as a prudent decision in the short term, it could lead to missed opportunities for SVB to benefit from a potential increase in value of these securities in the future.