US-based Silicon Valley Bank, which filed for bankruptcy after reporting losses, saw its stock prices fall as much as 60 percent in a day on Friday. With the crisis gripping the company, Tesla and Twitter CEO Elon Musk said he is open to buying the company.
“I’m open to the idea,” Musk said in a tweet, responding to a tweet from Razor co-founder and CEO Min-Liang Tan who said, “I think Twitter should buy SVB and become a digital bank.”
Silicon Valley Bank, one of the largest commercial banks in the US, has relationships with more than 50 percent of all venture capital backed companies in the US and countless venture capital (VC) firms.
The crisis at Silicon Valley Bank worsened after the company sent a letter to shareholders saying it will try to raise more than $2 billion in capital after incurring losses. This triggered a massive sell-off in the company’s stock, which fell by as much as 60 percent in a day.
SVB’s financial profile benefits from an abundance of client funds, including on-balance sheet deposits and off-balance sheet investments from clients. Average client funds were high at $348 billion in the fourth quarter of 2022.
The SVB crisis
SVB saw a massive influx of deposits in 2021, jumping from $61.76 billion at the end of 2019 to $189.20 billion at the end of 2021. As deposits grew, SVB was unable to grow its loan portfolio fast enough to generate the desired returns on this capital.
The bank therefore purchased a large amount (more than $80 billion) of mortgage-backed securities (MBS) with these deposits for their hold-to-maturity (HTM) portfolio. Nearly 97 percent of these MBS had a term of more than 10 years, with a weighted average yield of 1.56 percent.
However, with the rise in US Fed interest rates, the value of the SVB’s mortgage-backed securities (MBS) plummeted. This is because investors can now buy long-dated “risk-free” bonds from the Fed at a 2.5x higher yield. Precisely because of the rising interest rates of the US Fed, the value of existing bonds with lower payouts fell in value.
Suman Bannerjee, CIO at US-based hedge fund Hedonova, said: “SVB is an iconic Bay Area institution with very deep relationships with venture capitalists. In 2020 and 2021, the bank’s deposit base increased by $90 billion. But a bank has to make money by lending money.”
He added that SVB’s customer base is concentrated among California tech startups that already have plenty of cash and don’t need loans. Therefore, in 2021, SVB invested approximately $88 billion in mortgage-backed bonds. When the Fed raised interest rates, the value of these bonds collapsed, completely eroding SVB’s capital base.
Read all the latest business news here