Silicon Valley Bank’s Lack of Portfolio Management Leads to 2nd Largest Bank Collapse in U.S History
Silicon Valley Bank has been known as a hub of innovation and technological advancement for 40 years, supplying funding for many tech startups and venture capital firms. Due to recent pressures of interest rate hikes set by the Fed, SVB demonstrates an example of failure when properly managing investors’ investment portfolios and implementing hedging strategies, particularly when it comes to long-term bonds.
SVB Financial Group’s holdings, which primarily consist of assets such as U.S Treasuries and government-backed mortgage securities, were proven not reliable when the Fed announced its interest rate hikes, and their value dropped dramatically. The company’s turning point came when Moody released a report, on March 8, which signified the decrease in their portfolio value, leading to a downgrade in its credit rating. In order to limit the effect of Moody’s report, SVB attempted to raise liquidity by partially selling its assets, but unfortunately, SVB announced on the same day that it had sold $21 billion worth of its securities at a roughly $1.8 billion loss. On March 9, the following day, it was revealed that SVB was attempting to raise capital to meet clients’ withdrawal needs and fund new lending which sparked investor concern causing their stock price to decline. On March 10, in addition to the decline in stock value, the news triggered a wave of withdrawals from venture capitals and other depositors. Ultimately, SVB stock had decreased by 60% and led to a loss of more than $80 billion in bank shares globally. Silicon Valley Bank is now a full-service FDIC-operated bridge bank, a temporary national bank chartered by the Office of the Comptroller of the Currency and organized by the FDIC to take over and maintain banking services for the customers of a failed bank. As of March 14, the bank is open for business allowing new and existing depositors to have full access to their money.
Market analysts say that regulators have been asleep at the wheel as SVB’s strategy relied heavily on corporate deposits as opposed to retail deposits. Holding a large proportion of assets in loans and securities makes SVB significantly riskier than many other banks. Some argue that the bank’s downfall was due to its leaders’ greed for yield: its holdings were disproportionately exposed to long-term interest rates, which are at a 15-year high in an effort to bring down inflation. The increased rates hit the value of SVB’s securities, which subsequently damaged depositors’ confidence. Due to an unreasonable allocation of their portfolio, investors who primarily value liquidity, such as startups and venture capitalists, were overlooked when SVB conducted their investments mainly in long-term bonds. SVB also demonstrates failure at determining the suitability of their investors when deciding how to allocate their portfolio.
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