Silicon Valley Bank Was Flooded With Cash Before Crash

Silicon Valley Bank (SVB) is the Bay-area bank known for lending to tech world since the 80s. The bank has a reputation as being the lender of first resort for startups, not just for its location, but for its willingness to take risks on new technology, to lend based on revenue yet to be receive, to take ownership in the businesses it lends to, and its tech world connections in venture capital and abroad.

In 2015, 18 percent of its deposits were from international clients. An National Bureau of Economic Research (NBER) paper found that SVB provided financial services to over 50 percent of startups and was the largest lien holder of venture capital startups.

But that all turned sour this week as depositors tried to quickly remove their money following a liquidity crisis, there was a run on the bank, and the Federal Deposit Insurance Corporation (FDIC) stepped in to put the bank into receivership, making it the second largest bank failure in U.S. history.

A large driver of the bank’s problems have to deal with its large stake in held-to-maturity treasury bonds—treasuries that the bank bought with the intent on holding them until they were paid off. The value of a bond can fluctuate over time, but that doesn’t matter if they are held until maturity—they still regularly earn interest for the holder until they are paid off.

With higher interest rates in recent days, that leads to lower returns, or the coupon, on those treasury bonds. The interest rate on bonds declined to the point that they weren’t worth holding, giving low returns for depositors, so people started taking their money out.

While many banks have held-to-maturity bonds, SVB had a whopping $91 billion worth at the end of 2022. Not only was it a lot, almost half the bank’s assets, but it all appeared rather quickly. In 2020, the bank held over $16 billion worth. Within a year it would have $80 billion more.

SVB’s collapse also comes shortly after the struggles of Silvergate bank, the most common lender to the crypto world. While Silvergate occupied a different banking space, part of its issues also stem from having to sell off its securities to remain liquid and the losses it incurred in the process. The contagion has also affected other banks including First Republic, Western Alliance, Signature, and PacWest.

SPAC Investors

In its 2021 annual report the bank noted the flood of deposits that it had coming in, increasing 97.2 percent in 2021, from venture capital and special purpose acquisition companies (SPACs):

In recent periods, deposit growth has been driven by our clients across all segments obtaining liquidity through liquidity events, such as IPOs, secondary offerings, SPAC fundraising, venture capital investments, acquisitions and other fundraising activities—which during 2021 were at notably high levels.

SPACs became a popular investment vehicle in 2021, wherein a company without a business attempts to be listed on the stock market in the hopes of eventually merging with an active business.

Prior to SPACs, a number of Chinese companies used reverse mergers—acquiring a public shell company that eventually merges with a private company to gain access to markets—to do something similar. While reverse mergers are relatively common, the Securities and Exchange Commission (SEC) has issued warnings about investing in reverse merger companies, as many of them tend to fail.

But SPACs started seeing increased regulation from the SEC. First in March of 2022 with increased disclosure rules, and then more scrutiny recently following the crash of major crypto firms like FTX. A number of crypto companies, like Circle, were looking to SPACs as a way to take their crypto finance model public.

SVB’s Patents

With a substantial client pool of venture capital invested in the tech world, SVB has a sizable portfolio of patents as assets as well as lending to patent investors. Based on Justia, not only do they have influential patents like that for ink printer cartridges and relational databases from 20 years ago, the flood of deposits in the last two years led to a buying spree of 36 major patents. Prior to 2021 they had 10. No details about intellectual property assets appear to be listed in their annual reports.

Other Bond Losses

SVB may not be alone. A recent report from the FDIC showed huge losses in bank-held securities—for both held-to-maturity bonds and available-for-sale bonds—bonds that might be sold on the secondary market before they are paid off.

In total, losses are now hovering around $300 billion across all FDIC banks.