FDIC closes Silicon Valley Bank after bank fails to raise new capital

[Renew Deal]

8. This article explains some of it

I rarely comment on public events, but the reactions of the venture community to SVB’s financial issues is quite the special case. I’m troubled by the lack of understanding of the banking system by sophisticated investors; hence a quick primer.

SVB is going through a liquidity crisis. They clearly underestimated the velocity of their deposit base, thereby mismanaged their asset-liability mix. This was compounded by a period of unprecedented increases in interest rates by the Fed, causing SVB’s securities book to be worth less on paper than they paid for it.

Fixed income securities (bonds) go down in value if interest rates rise after issuance. For example, if I bought a 2-year treasury bond for a 1.75% annual interest rate a year ago, today’s market yield of 4.78% means investors would offer a significant discount to par for my bond. Yet, at maturity, I would still get the full value of my bond plus interest back from the US Treasury. These are called “money good” securities. There is no impairment or credit issue with the securities, but the value has decreased due to changes in market prices.

A liquidity crisis is quite different from what we saw in ’08, where bank securities were NOT money good, and the market would only pay pennies on the dollar for credit-impaired bond.


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