Mar 10, 2023 - Economy

Behind Silicon Valley Bank's sudden rush for cash

Illustration of a U.S. one hundred dollar bill cut into the shape of a unicorn

Illustration: Annelise Capossela/Axios

The bank of choice for Silicon Valley's hot startups is suffering a remarkably sudden reversal of fortune.

What happened: The parent of Silicon Valley Bank (SVB) late Wednesday said that it was seeking to raise over $2 billion in capital, after facing big losses on a giant batch of bonds it sold.

  • The specter of a bank seemingly rushing to raise cash spooked investors and depositors.
  • The stock collapsed by 60% on Thursday — and soon after the close of trading a flurry of headlines about tech firms and founders rushing to withdraw funds from the bank in what seems very much like a run set off another 20% plunge in the after-hours session.

Why it matters: The saga of Silicon Valley Bank is a striking example of how the surge in interest rates over the last year continues to upend once high-flying investors, financial institutions and companies that thrived in a world of low-interest rates.

  • In other words, the Fed's steepest interest rate-hiking campaign since the early 1980s has changed everything.

Be smart: At their simplest, banks are in the business of borrowing short-term, cheap money — typically deposits — and then investing that money at higher rates, often by making longer-term loans or buying safe government bonds.

  • The bank's profits, in part, come from the difference between the interest it pays to borrow, and the interest it receives when it lends or invests.

Zoom in: SVB has been finding it harder to earn money over the last year because a key source of cheap deposits — the venture capital boom — has slowed down, just as losses in its investment portfolios have risen.

  • Many of SVB's depositors are venture capital-funded tech companies. When tech stocks and start-up valuations were soaring — in 2021 for instance — seemingly endless rounds of venture capital rolled in to prop up unprofitable tech startups. SVB's cheap deposit base swelled.
  • But the brutal sell-off in tech stocks, and downturn in startup valuation, has slowed the flow of venture capital.
  • That means money-losing tech companies are rapidly burning through the cash that previously sat as deposits at SVB, with few fresh investor checks rolling in to help them out and puff up SVB's deposit base.
  • Simultaneously, rising rates have driven down the value of loans and bonds that the bank holds in its portfolio.

What they're saying: "Given the pressure on their end markets, especially the elevated levels of client cash burn, [SVB] is seeing continued material outflows of client funds," wrote David J. Chiaverini, an analyst at Wedbush who covers the company.

  • "This may have raised liquidity and capital concerns for the bank," he went on, describing the reasoning behind the financial moves SVB announced this week.

In banker speak, "liquidity concerns" translates roughly as "the bank needs to come up with some cash, quick."

  • To do that, SVB sold a $21 billion slug of government bonds. But because interest rates have risen so much — bond prices fall when rates rise — it sold them at a loss of $1.8 billion.
  • To patch that hole in its finances, the bank also moved to raise money by selling new shares as part of a plan to come up with $2 billion in capital.
  • The bank also slashed its profit outlook for the entire year.

What we're watching: Whether this is a one-off situation stemming from Silicon Valley Bank's unique role as the banker of choice to venture-funded startups, or if there are broader issues at play for the banking system.

  • Banks big and small took a beating Thursday, as the S&P's finance sector fell more than 4%. JPMorgan dropped 5.4%. First Republic Bank, also based in the heart of Northern California tech country, fell more than 15%.

Editor's note: This story has been updated.

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