SVB (Silicon Valley Bank) started in 1983, about the time Bicarbolyte, my medical device company,  was coming alive.  We thought long and hard about using this bank, since it appeared using SVB could  make our plans easier to materialize.

Our model for the dialysate company was to become a national and international company the way Breakstone’s and a slew of milk processors operated.  We weren’t’ going to have one or two big plants that would service everyone, but a series of smaller, regional facilities that criss-crossed America and the world.

All of our R&D and quality assurance work would be done at corporate headquarters.  Furthermore, all orders would be processed at headquarters, and it would assign the lots of product to be delivered (and when) to the clinic or hospital.  So, all our critical information would be in one place. And, under the control of our most qualified folks.

Had we chosen SVB as our bank, all our banking would be situated  with them, which would make our accounting easier to handle (not to mention payroll).  Yet, we chose to use multiple  regional banks, which we funded from our main bank contiguous to our headquarters location.

That was our choice.  Because keeping all our money in one bank made us a little squeamish.

As by now you know, that was how SVB operated.  Those clients of SVB,  the VC funded high tech and bio firms, kept their funds in the 40 year old bank.  Part of that was by the design of SVB- which wanted money they loaned their customers to be in accounts at the SVB bank.   But, it also meant that if something went wrong, the funds for many of these R&D efforts would disappear.

That system had worked well until the Federal Reserve began raising interest rates last year to cool our rampant inflation. At the same time, start-up funding started to dry up, putting pressure on many of the bank’s clients — who then began to withdraw their money from the bank. To honor those requests, Silicon Valley Bank was forced to sell off some of its investments at a time when their value had declined. In its surprise disclosure to the public last Wednesday, the bank said it had lost nearly $2 billion.

Now, I also know from speaking to a bunch of my clients that many of you consider this banking fiasco situation somewhat arcane.  Yet, it’s really very simple.

Consider one of our favorite movies.  “It’s a Wonderful Life” starring Jimmy Stewart and Donna Reed.  The Bailey Savings and Loan is about to go under because Uncle Billy lost track of some very important money.  And, that meant there were insufficient funds available to the bank to cover its needs.  Which led to a bank run.

That’s exactly what happened with SVB.  Their executives were just as unsophisticated as Uncle Billy and they didn’t realize how bad it was getting as the Feds were raising rates.  (SVB did not employ a risk advisor.  And, that professional would have recognized that the spread (which is how a bank makes money) between the cost of the funds and the return on their investments (loans and, in SVB’s case, mortgage backed securities) was shrinking- and fast.  (We’ll come back to this fiasco shortly.)

So, the California Department of Financial Protection and Innovation shuttered the bank on Friday, 10 March.  At which time, the Feds began searching for a buyer. No such takers were found in the USA (it’s not easy to buy a bank with some $ 200 billion in assets), but HSBC bought the UK branches of SBV for a pound (£).  Which is why the FDIC created a new bank, the National Bank of Santa Clara to hold the assets of the now defunct SVB.

Back when the US Banking System almost failed back in 2008, we created a series of regulations that demanded the banks survive “stress tests”.  Part of that was increased cash reserves requirements.

Some ten years later, federal disclosure records show the bank (and CEO Greg Beck) were lobbying lawmakers about “financial regulatory reform” and the Systemic Risk Designation Improvement Act of 2015 – a bill that was the precursor to legislation ultimately signed by President Donald Trump that rasied the regulatory threshold for stronger stress tests to banks that had  $250 KKK in assets.  President Trump (and the GOP) let SVB and similar banks slide. Which is really bad for a bank that has no risk management officer!

Here’s another fact.  Banks generally fail due to “credit risk”  failure  (another way of say loan default problems).  But, the SVB and Signature Bank  failures were the results of other two (much lower impact) risks- interest rate risk and liquidity risk.  Both of which risks should have been on the bank’s radar, due to the incessant rate adjustments afforded the  US by the Fed’s battle with inflation (which raised interest rates by 4.5 % so far this year).  SVB – which used the relaxed stress test rules to its  (dis)advantage had 55% of its assets in fixed-income securities (US Govt bonds). And, that’s a problem when the security must be sold to cover a liquidity issue.  Because its value is usually insufficient to recover its costs.

Moreover, SVB had fewer than 38000 individual account holders (and few, if any, individual customers, which is yet another way to spread risk at a bank).  Its deposits were  from VC funds, tech and life sciences.  These deposits were often from initial public offerings and SPAC deals—SVB banked almost half of all IPO proceeds in the last two years. Most of the US startups had relationships with the bank.

These startups banked with SVB both for its cachet and because more than half of SVB’s loans went to venture and private-equity firms backed by the borrower’s limited-partner commitments, a legal but slippery way to goose venture funds’ all-important internal rate of return metric, IRR, by investing three to six months before calling investors for cash. VCs are very persuasive with startups.

In 2021, SVB passed the threshold of $100KKK under management, triggering some additional scrutiny as a Category IV bank but remaining exempt from the more frequent and detailed analyses that regulators perform to determine whether banks above $250KKK of assets have sufficient capital to withstand a crisis.

A press release on Friday from the Federal Deposit Insurance Corporation noted that as of December 2022, SVB had $209 KKK in assets under management – keeping it below the $250KKK threshold for which the bank had lobbied.

SVB has become  the biggest bank to collapse since Washington Mutual failed in 2008 during the financial crisis, and the second-biggest bank failure in US history.

I, for one, do find it interesting how this libertarian bank that wanted to be free of government interference was the fist to clamor for the Feds to bail it out when it did  screw up.