What Led To Silicon Valley Bank Violent Implosion?

SVB Financial Group Inc’s (SIVB.O) collapse and takeover by banking regulators on Friday can be traced to the U.S. Federal Reserve hiking interest rates and souring the risk appetite of investors.

Here is the series of events that caused the Silicon Valley Bank’s failure:

Federal Reserve Hikes Rates

The Federal Reserve has been hiking interest rates from their all-time low levels since 2022 in its bid to combat inflation. Investors have less appetite for risk when the money available to them becomes costly because of the higher rates. This weighed down on technology startups – the main clients of Silicon Valley Bank – because it made their investors more risk-averse.

Some Silicon Valley Bank Clients Faced Cash Crunch

As higher interest rates prompted the market for initial public offerings to collapse for many startups and made private fundraising more expensive, some Silicon Valley Bank clients began withdrawing money to meet their liquidity needs. This ended with Silicon Valley Bank searching for ways this week to meet its customers’ withdrawals.

SVB Sold Bond Portfolio At Significant Losses

To fund the redemptions, Silicon Valley Bank sold on Wednesday a $21 billion bond portfolio comprising largely of U.S. Treasuries. The portfolio was yielding an average 1.79%, well below the current 10-year Treasury yield of nearly 3.9%. This pushed SVB to recognize a $1.8 billion loss, which it required to fill through a capital raise.

SVB Announced Stock Sale

SVB disclosed on Thursday it would dispose of $2.25 billion in common equity and preferred convertible stock to fill its funding hole. Its shares closed trading on the day down 60 percent, as investors worried that the deposit withdrawals may push it to mobilize even more capital.

Stock Sale Collapsed

Some SVB clients withdrew their money from the bank on the advice of venture capital firms such as Peter Thiel’s Future Fund, Reuters reported. This rattled investors such as General Atlantic that SVB had lined up for the stock sale, and the capital raising effort collapsed late on Thursday.

SVB Sunk Into Receivership

Silicon Valley Bank hurried on Friday to obtain alternative funding, including through a sale of the company. Later in the day, however, the Federal Deposit Insurance Corporation (FDIC) then made it known that SVB was closed and placed under its receivership. The FDIC added that it would strive to sell SVB’s assets and that future dividend payments may be effected to uninsured depositors.