What Happened to Silicon Valley Bank?

[Ed. note: This teleconference was held Friday, March 10, only a few hours after the news of SVB’s shutdown was announced]

On March 10, Silicon Valley Bank (SVB) collapsed and was taken over by federal regulators. After a capital crisis and what can be called a “classic” run on the bank, SVB’s demise happened quickly, the complete collapse happening within 48 hours. To get in-depth expert insight to our clients as soon as possible, GLG’s Jackie Murphy organized and hosted a teleconference with Stephen Curry, GLG Network Member and former Chairman and CEO at Gateway First Bank, that same day. What follows is an edited excerpt from that teleconference.

Let’s start by walking through what’s happened in the last 24 hours and where we stand right now.

I think that the regulators were faced with a situation where they needed to move promptly or the situation would deteriorate a lot further. They would not have made this move if the bank had adequate capital or adequate liquidity. What this tells you is that there is a considerable hole in the balance sheet, which we cannot see and cannot quantify. In a situation like this, sometimes these deposits accelerate very quickly and it takes a while due to processing that kind of volume. I’ve seen it, I’ve witnessed it, I’ve been involved in it. I’m sure it was a surprise to management, perhaps to the regulators as well. That was the reason they would’ve made a move so quickly.

It’s important to stop things like this before it becomes a contagion across the industry. They certainly want to prevent systemic risk as much as possible. So the bank was placed into what’s called a receivership and under the control of a new bank charter, which is directly managed by the FDIC. I would not expect them to take rapid steps from this point on. They’re going to be very methodical about this. They have a very well-defined playbook for situations like this. While this is certainly the largest event of its kind since Washington Mutual, actually, in some ways SVB is larger. There are a lot of depositors here, an enormous concentration in one industry, so they’re going to be careful about trying to get this receivership process done as objectively and quickly as possible.

What’s the difference between a regulatory shutdown vs. a full collapse? As in, is there an opportunity for Silicon Valley Bank to be revived at all?

It’s highly unlikely that SVB could be revived. I mean, the only path to revival would be some kind of private capital raise. The order of magnitude here is very large. Given that we’ve seen trillions of dollars of liquidity removed from the system in the last year, it’s currently harder to raise capital than it has been for quite some time. It’s unlikely that a private investor group could pull that off. I think the regulators would be very concerned about reviving the bank only to have the same kind of problems again. In other words, they’re not likely to go down that road.

How will corporate client assets, such as treasury bills, held in SVB be treated as part of the receivership process? And will such corporate clients be able to access those assets or are they treated as uninsured deposits?

If they’re in custody accounts, that’s a different animal than a depository account. And so having gone into receivership, that puts everything in a legal bind. So nothing is likely to happen on Monday, for example, if customers want access to those securities. Although there may be some willingness to work on this behind the scenes, I would suspect that there would need to be some clearance before that happened. I wouldn’t expect custody assets to be subject to receivership in any way other than just being a little complex to get out of custody.

Is SVB alone or are there other banks that beyond coming to the rescue, could actually be at risk themselves of potential similar fallout?

This bank had a very high concentration of assets and securities, more than 50%, and that’s very unusual in the banking industry. Also, their deposits and investments were not match funded. So there was a built-in significant risk that institutional money that sat in the commercial BDA, money market and CDs, and cash management accounts, could become hot money on an overnight basis. And I doubt that anybody modeled it that way.

And this is where the banking industry has looked at the rising rates, more as an interest rate risk than a liquidity risk. And even when they modeled liquidity risk, they didn’t factor in the amount of illiquidity in securities which were going to be underwater and what the net cost could be to capital if they had to sell them. This means that some of that data in the balance sheets of the large institutions that have big help for sale portfolios, and that data is publicly available, in turn translates as some pretty high exposure levels as a percentage of total capital, so that’s something to look at and consider.

But some of this is not in line of sight because banks that have classified securities as held in maturity don’t have to report the mark-to-market unrealized gains or losses. And as such, you just don’t know. The only way you can get a hold of that data is to look at the maturity of the securities portfolio. And if the securities portfolio has a material amount of exposure, medium- or long-dated, then that’s something to consider as a red flag.

The other thing to think about are businesses that serve institutional clients, whether that’s correspondent banks for mortgage or banking, or other institutional services, custody type services. I don’t really think those banks are going to have this kind of problem, but if you want to consider that risk and how it could evolve, those would be the other areas.

Any bank that has a significant amount of brokered CDs is another thing to be focused on. I would expect, coming out of this, the regulators are going to be very focused on liquidity and their examinations, and those banks where they see that they don’t have adequate liquidity or may not coming into this quarter, are going to get calls and they’re going to get pressure to address liquidity issues or raise new capital, or both.

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About Stephen Curry

Stephen Curry has provided advisory services to management teams and boards of national and regional banks, financial services companies, start-ups, and private investor groups for over 15 years.

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Questions Asked During the Teleconference

• Can you start by just walking us through what’s happened in the last 24 hours and where we stand right now?
• What’s the difference here between the regulatory shutdown versus a full collapse? Is there an opportunity for Silicon Valley Bank to be revived?
• How will corporate client assets held in the bank such as treasury bills be treated as part of the receivership process? And will such corporate clients be able to access those assets or are they treated as uninsured deposits?
• As we think about the VC landscape and how much capital was in Silicon Valley Bank, from your perspective, and I know this is on everyone’s mind, you’ve alluded to it in your introduction, but which banks would you see as positioned to potentially benefit from all this excess extracted cash?
• What does that process potentially look like? How quickly could that all come into play?
• Is SVB alone or are there other banks that would be comparable and, in a sense, beyond coming to the rescue, could actually be at risk themselves here of potential similar fallout?
• What are the indicators or red flags that we should be paying most close attention to at this point, whether it’s relating to broader contagion risk or potentially longer timelines around the turnaround here for SVB creditors specifically, and what is the priority of payment of uninsured deposits or uninsured deposits vs. the FHLB advances?
• If a company has a majority of its money in SVB, unfortunately, could you discuss their options and ways to navigate the current scenario? Could the Fed step in and provide liquidity for Silicon Valley Bank with some of its securities as collateral?
• What are the chances that regulators could grant a waiver to the very large banks to avoid the deposit cap limit, what are your views on that?
• Which regulator holds the ultimate control in this scenario? Is it the FDIC or California banking?
• What is your overall view of risk spreading beyond SVB in this scenario?
• Would receivership certificates from the FDIC granted to depositors be accepted by other banks as collateral to get some interim liquidity?
• To what extent are you familiar with First Republic and its business, and how similar is it to Silicon Valley Bank?
• Was Silicon Valley Bank compliant with liquidity requirements if something like this were to happen?
• A separate question now on fintechs using Silicon Valley Bank for their payment rails. Is there risk related to business continuity and possible losses for those businesses?
• How did SVB rationalize having 50%-plus of their assets in securities?
• If you were an investor in this scenario, what would you be paying the closest attention to?
• Given your experience, what would you want to leave the audience with today?