Svb is the bank of choice to startups. And by bank I don't mean bank they go to for investment banking advice. I mean its the bank they use for bank stuff like depositing checks and writing checks.So I fear I'm back to meow's explain-it-like-I'm-a-five-year-old territory........ if this is a policy failure, why is it limited to this one specific institution? What are the unique factors?
So from like 2021 to 2022, svb's customers deposited $130 billion into the bank. That money came from startups raising money in the stock market through IPOs. I read something like 40 percent of all IPO dollars ended up in svb deposit accounts.
Over the last 15 months, tech startups have slowly spent that money without raising more money. As we all know there are a lot of startups that burn through cash and don't have a real business model for making money. So that $130 billion that came into has left the bank without any new money coming in.
Most normal depositors spend money, but they also obviously have money coming in, whether it's a paycheck from an employer or revenue if the depositor is a business. These tech startups did the spending part but not the depositing parts.
Meanwhile, svb took that $130 and had a few options: lend it or sit on it. It's hard to lend a hundred billion dollars. It's not hard to but a hundred billion dollars of treasury bonds and mortgage backed securities. Its safer to buy bonds than it is to lend to businesses and it's easier to liquidate bond holdings. Over the past 40 years, these bonds have had stable prices.
The last 12 months, the prices of bonds have dropped. It has been like a 10 percent drop or something. And it's definitely the feds fault that the price dropped.
So svb's depositors have been spending money, so the deposits in svb have shrunk. Svb has to sell the bonds so that there is cash in these actual accounts.
News came out that they sold like $20 billion in bonds at a $1.8 billion loss. That isn't enough to kill a bank. But it's close. So the bank went to the stock market to raise $2 Billion to plug the loss. They could have survived (at least afor a while) if the stock sale went through AND depositors slowed the rate of withdrawals.
But word got out that svb was hurt, and there was a panic. So customers tried to withdraw 42 billion in a day. No bank could survive 25 percent of their customers trying to withdraw all of their money in a day.
So tldr; if you want to know what's different about svb, it is that their depositors have different spending and depositing habits. They deposited a lot very quickly and withdrew it quickly even before the bank run. While all of this was happening, svb's investments lost value quicker than any time in the last 40 years even though these investments were about as safe as you can get.