THE FAILURE OF SVB FINANCIAL

March 13, 2023

Sean Ryan
sean.ryan@factset.com
The Failure of SVB Financial Group
Timely regulatory action mitigates surging systemic risk. The joint announcement on March 12 by the
Treasury, Federal Reserve, and FDIC that all depositors at both SVB Financial and Signature Bank would be
made whole, along the establishment of a new liquidity facility for depositories, have hopefully ended the
incipient banking crisis. The new liquidity program, the Bank Term Funding Program, will make advances up
to the value of pledged collateral, with collateral valued at par, priced at the one-year overnight index swap
rate plus 10 basis points.

The extent to which this action constitutes a bailout (or adheres to Walter Bagehot’s rule for central bankers
of “lending freely against good collateral at a penalty rate”) is in the eye of the beholder; equity holders aren’t
getting any relief, but depositors with uninsured balances are. The long term costs of underwriting moral
hazard remain to be seen, but the short term costs of not doing so appeared very dire indeed. While the
immediate crisis has been averted, the heightened awareness of risk will hopefully persist; banks still face
plenty of challenges from higher rates and investors are likely to remain more attentive to liquidity and other
risks that had arguably been getting less attention than they were due. The purpose of this report is to offer a
high-level review of how we came to this pass, and where we go from here.

How We Got Here

The 2021-22 venture capital boom. The core of SVB Financial’s business is the venture capital ecosystem,
taking deposits from, and making loans to, VC-funded companies. As shown in Figure 1, VC deployments
spiked in 2021 and then declined in 2022 as interest rates rose.

Figure 1: The current tightening cycle is the steepest in over 40 years

U.S. VC-Backed Investment Activity

($Billions)
$100 $94
$89
$90 $83 $80
$79
$80 $75
$70
$60 $49 $46 $47
$50 $41
$37 $38 $34 $39 $38 $36
$40 $30
$30
$20
$10
$0

Source: Company filings

The steepest tightening cycle in memory. Critically, interest rates didn’t just rise a little bit. As shown in
Figure 2, coming off the COVID-driven extension of ZIRP, inflation in 2022 catalyzed the fastest, highest
increase in the Fed Funds rate in over 40 years. Notably, the two cycles with the closest trajectories to the
current one were those of 1988-89, which presaged what, until 2008, was the worst banking crisis since the
Great Depression, and of 1994-95, which also came after a long period of low rates, and thus also created
large losses in bank securities portfolios.

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Figure 2: The current tightening cycle is the steepest in over 40 years

Fed Tightening Cycles: FF Increase by Month

5.00

4.00

3.00

2.00

1.00

0.00
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39

2022-23 2015-18 2004-06 1999-2000

1994-95 1988-89 1983-84

Source: FactSet

A bad situation, badly managed. As quickly as venture capital funds poured money into start-ups, the start-
ups poured the money into their bank accounts, fueling heroic deposit growth at SVB Financial. Between year-
end 2020 and March 31, 2021, total deposits at the bank rose 94% (and since VC funds typically invest sums
larger than $250,000, very little of the deposits are insured by the FDIC). Lacking commensurate lending
opportunities, the bank bought securities, mainly stretching for yield by deploying 81% of the increase in
deposits in longer term MBS in the HTM portfolio. Unfortunately, as shown in Figure 3, the 2021 growth in the
securities book was immediately followed by the rise in interest rates, leading to enormous unrealized losses.
While these losses don’t flow through the AOCI line like losses in the AFS portfolio do, they are just as real.

Figure 3: The current tightening cycle is the steepest in over 40 years

4.50% $140
$126 $125 $122
4.00% $120 $117
$120
$106
3.50%
$100
3.00% $84
2.50% $80
$67
2.00% $60
$48
1.50% $39
$31 $40
1.00% $26
$20
0.50%
0.00% $0
20Q1 20Q2 20Q3 20Q4 21Q1 21Q2 21Q3 21Q4 22Q1 22Q2 22Q3 22Q4

SIVB Total Securities ($Billions) 10 Year Treasury Daily Avg Yield

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Source: FactSet

The failed capital raise. All this set the stage for last week’s failed capital raise. We’d be lying if we said we
fully understood how it happened; hindsight is always 20/20 but on March 8 SVB’s proposed capital raise
didn’t look like the catalyst for a bank run, let alone a systemic banking crisis. The losses in the HTM book
were massive relative to SVB Financial’s equity base, but had been fully disclosed all along. The bank’s
depositors were largely uninsured, but there again, no new news. The ratings downgrade was brewing and
the mid-quarter update did point to continued VC cash burn and related deposit outflows, neither of which was
trivial. The next day, in an echo of 2008, the stock fell below tangible book value, entering a spiral that took
the prospective capital raise from accretive to book, to dilutive, to impossible.

Where Do We Go From Here

Dosis sola facit venenum (only the dose makes the poison). The table below summarizes some crucial
risk factors for SVB Financial (and Signature Bank), and also lends some comfort that other banks don’t face
the same magnitude of risks. Every bank has uninsured deposits, and securities losses and deposit outflows
are facts of life for the entire banking system in 2023, but only at SVB Financial and Signature were the doses
lethal (setting Silvergate aside as having been likely unsurvivable for idiosyncratic reasons).

To arrive at this list, we sorted banks based on the share of deposits in accounts with balances above the
insurance ceiling, removing G-SIBs and non-customer-facing banks. What remains is, unsurprisingly, a list of
business-oriented banks. To be clear, we do not suggest that these banks are poised to follow in the footsteps
of SVB and Signature. Some have large HTM losses, some have seen significant deposit outflows, some have
valuations that could make equity issuance challenging, and all have a high share of uninsured deposits, but
generally don’t have all those issues, and not of similar magnitude. These are, however, data to which the
market is likely to remain more attuned than it had been prior to last week.

Figure 4: SVB Financial and Signature Bank Were Outliers

Bank Ticker Price Market Cap Deposit Growth HTM Loss/ Price/ Deposits in
3/10/2023 ($mm) 2021 2022 TCE TBV Accts > $250K
SVB Financial Group SIVB $39.37 $2,331 86% -9% -128% 20% 97.0%
Signature Bank SBNY $70.00 $4,405 68% -17% -10% 55% 93.8%
ServisFirst Bancshares, Inc. SFBS $62.77 $3,415 25% -7% -8% 266% 83.7%
UMB Financial Corporation UMBF $77.09 $3,739 32% -8% -24% 156% 82.3%
First Foundation Inc. FFWM $11.58 $653 49% 18% -10% 71% 81.1%
First Republic Bank FRC $81.76 $14,962 36% 13% -35% 110% 80.0%
CVB Financial Corp. CVBF $21.61 $3,021 11% -1% -34% 260% 79.5%
Texas Capital Bancshares, Inc. TCBI $61.13 $2,948 -9% -19% -4% 108% 79.2%
East West Bancorp, Inc. EWBC $62.71 $8,842 19% 5% -10% 160% 78.2%
Preferred Bank PFBC $62.24 $928 18% 6% 0% 142% 77.1%
Western Alliance Bancorporation WAL $49.34 $5,408 49% 13% -4% 123% 76.7%

Source: FactSet

Mid-quarter updates from the survivors. Of the nine surviving banks on the above list, five have provided
mid-quarter updates, including two since the regulators’ announcement Sunday evening. First Republic
disclosed total available liquidity exceeding $70 billion, including incremental liquidity available from the
Federal Reserve and JP Morgan Chase, but excluding liquidity from the just-announced Bank Term Funding
Program. East West Bancorp disclosed a 1% decline in deposits quarter-to-date, attributed to a planned
reduction in brokered deposits, and noted unused borrowing capacity amounting to over 50% of total deposits.
First Foundation, Western Alliance, and Preferred Bank each released updates prior to the regulatory
announcement (links are to Street Account’s summaries of each).

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Heightened focus on concentrations and exposures. While the immediate danger has receded, we
anticipate that markets will become more vigilant about bank concentrations and exposures. Some types of
concentration are obvious and easily observed, such as geographic concentrations that, for depositories, tend
to be revealed by deposit share data.

Other forms of concentration can be more challenging to get one’s arms around; consider SVB’s venture
capital concentration; VC-funded companies aren’t evenly distributed across SIC codes – there are rather
more in life sciences than in, say, iron smelting – but they are nonetheless spread out across many industries
in many sectors. For banks, a review of relationships disclosed in term and revolving credit agreements can
be useful; SVB, for example, is listed on 245 agreements, with the industry distribution shown in Figure 5.

Figure 5: Silicon Valley is a creditor on 245 separate loan filings, grouped here by industry

Source: FactSet

The post-ZIRP adjustment is still in the early innings. SVB’s deposit decline was sharper than most, but
deposits have been declining on an industrywide basis for several quarters now and that source of stress has
surely not run its course yet. And even though uninsured depositors are being made whole in these recent
failures, the long term reaction of depositors to the events of the past week remains to be seen; some shift of
market share, likely toward the too-big-to-fail cohort, wouldn’t be shocking. As a result, the metrics that have
suddenly gained so much currency in the past few days seem likely to retain much of that attention for the
foreseeable future. At least until, inevitably, credit quality rears its ugly head.

Copyright © 2022 FactSet Research Systems Inc. All rights reserved. FactSet Research Systems Inc. | www.factset.com