On Friday, Silicon Valley Bank (SVB) was closed by California banking regulators and put under the control of FDIC. As the 16th biggest lender in the U.S. at the end of 2022, this makes SVB the largest bank to fail since Washington Mutual, a catalyst for the 2008 financial crisis.
While there are many questions still lingering, one thing is certain: world markets will experience volatility in the coming weeks.
Here’s what the SVB collapse means for real estate.
WHAT HAPPENED WITH SVB?
SVB’s collapse brings back nightmares from 2008. And while the gravity of the situation is heavy, it’s important to note that the circumstances are different.
Silicon Valley Bank offers tech companies—particularly startups—a range of products, including deposit services, loans and cash management. Since most startups have an influx of cash from investors, most of SVB’s money was made on deposits.
With a boom in venture capital funding over the past few years, the banks’ deposit balances more than tripled between the end of 2019 and the start of 2022, to $198 billion. SVB put the majority of these deposits into securities, with some “held-to-maturity” (HTM) assets and the rest “available for sale” (AFS) assets.
According to Marc Rubinstein, former hedge fund manager, “the shorter duration AFS book grew from $13.9 billion at the end of 2019 to $27.3 billion at its peak in the first quarter of 2022; the longer duration HTM book grew by much more: from $13.8 billion to $98.7 billion.”
But as the tech boom slowed, SVB’s startup customers began to ask for some of their deposits back. Word quickly spread among the niche customer group of the bank, with more and more asking for their deposits, eventually leading to a bank run.
SVB had to sell some of its AFS assets to return money to its customers. And since it couldn’t sell HTM assets, it sold $21 billion in bonds last week. In doing so, SVB took a $1.8 billion loss and sought to raise money from investors. Only, the bank failed to raise the capital—and days later, failed completely.
HOW IS THIS DIFFERENT FROM 2008?
Last night, FDIC announced that SVB would reopen Monday, March 13, giving all insured depositors full access to their insured deposits, while uninsured depositors will be paid an advance dividend within the next week.
Posted by
Mar 13, 2023
