Jackie Reses & Kris Dickson: What Happened with SVB? Are VCs to Blame? | E988

Root Causes of the SVB Collapse

• Asset-Liability Mismatch: SVB invested heavily ($90B+) in long-dated held-to-maturity securities (mostly MBS >10 years) in 2021 when rates were near zero.
  • The bank signaled no intent to sell these assets, avoiding mark-to-market adjustments on their financial statements.
  • This bet relied on sustained low interest rates and continued VC tech momentum.
• Concentration Risk: The deposit base and loan portfolio were hyper-concentrated in the VC tech startup ecosystem.
  • When the tech boom faded and rates rose, deposits shrank while funding needs for startups increased, creating a liquidity crunch.
• Unrealized Losses Exceeded Capital: By the end of 2022, the actual value of held-to-maturity securities was $76B, compared to a book value of $91B.
  • This $15B gap represented a larger loss than SVB's entire market cap for much of Q4 2022.
• The Catalyst Event: The bank attempted to raise $2B in capital to cover a $1.5B hole but failed to secure the funds due to market panic.
  • Depositors withdrew over $40B in a single day, forcing the FDIC takeover.

Strategic and Communication Missteps

• Premature Capital Raise Announcement: SVB announced a $500M capital raise via market offering on a Sunday for the following Monday morning.
  • This timing created an immediate panic dynamic among the interconnected VC community, who interpreted the need for immediate capital as a signal of insolvency.
• "Last Man Standing" Psychology: The announcement triggered a self-fulfilling prophecy where depositors rushed to withdraw funds to avoid being the last to do so.
  • Chris notes that no single depositor could be expected to do nothing; acting as fiduciaries, VCs felt compelled to move capital immediately upon perceiving any non-zero risk.
• Speed of Contagion: The collapse was accelerated by the combination of instant digital communication (social media) and electronic banking withdrawal capabilities.
  • Unlike the 2008 crisis, rumors spread globally within hours, compressing the timeline of a run on the bank.

Systemic Risk vs. Individual Error

• Industry-Wide Unrealized Losses: FDIC data indicates the broader banking system had $620B in aggregate unrealized losses on securities as of Q4 2022.
  • These losses were three to six times higher than in any year over the previous 15 years due to rising interest rates.
• Differential Impact: While losses were elevated across the sector, not all banks faced SVB-style concentration risks; the danger lies in sector-specific depositor concentration.
  • Jackie argues that blaming the VC community entirely is unfair, as their risk assessment logic to move funds was sound given the circumstances.
• Regulatory Context: Following the 2008 crisis, nearly 400 banks failed in the subsequent three years; in the last five years (including SVB), there have been only nine failures.
  • This suggests that post-Dodd-Frank capital and liquidity requirements have generally strengthened the system.
• Psychology vs. Fundamentals: Chris argues that while Lehman failed due to toxic mortgage assets, SVB held conservative, liquid assets (agency MBS/Treasuries) but failed due to a liquidity mismatch and depositor confidence crisis.

FDIC Resolution Process and Outcomes

• Immediate Takeover: The FDIC typically takes over failed banks on weekends to pause the "pull" on deposits and assess the balance sheet without market pressure.
  • SVB employees signed four-week contracts with the FDIC to assist in asset counting and data retrieval.
• Payment Waterfall: The FDIC follows a strict priority for payouts:
  1. Federal Home Loan Bank (FHLB) advances.
  2. Administrative expenses.
  3. Insured deposits (up to $250,000 per account).
  4. Uninsured deposits (via asset liquidation).
• Advanced Dividend: The FDIC can issue an "advance dividend" on Monday morning by selling the most liquid assets immediately.
  • Speculation suggests this could cover 50% or more of uninsured deposits, but the exact figure depends on the FDIC's liquidation strategy.
• Uninsured Depositor Profile: Only 2% of SVB's depositors held balances below the $250,000 insurance limit; the vast majority were overinsured.
• Lehman Comparison: The Lehman liquidation took over 14 years to distribute ~$129B; SVB's process is expected to be shorter due to the simpler nature of its assets (MBS vs. Lehman's complex derivatives).
• Preferred Scenario: The optimal outcome is the immediate sale of SVB to another institution (e.g., Morgan Stanley, PNC, JP Morgan) to ensure continuity of operations and 100% deposit access.
  • A buyer would acquire the high-quality client base, though they must assume the liability of uninsured deposits.
  • Regulators are expected to facilitate a buyer to prevent broader market contagion.

Risks to Other Banks and Future Implications

• Contagion Risk: Banks with concentrated industry exposure (e.g., digital assets, tech) face immediate deposit pulls due to psychology, even if their balance sheets are fundamentally sound.
  • First Republic Bank explicitly stated its diversified portfolio to deter panic.
• Shift Toward Systemic Banks: Deposits are expected to flow toward the top four "blue chip" banks (Systemically Important Financial Institutions) and strong regional banks (e.g., PNC).
• Threat to Community Lending: A total concentration of capital in mega-banks could create "banking deserts" in local communities, reducing credit flow to Main Street businesses (restaurants, local services).
  • Local banks like Lead Bank play a critical role in commercial real estate and local credit markets.
• Embedded Finance Constraints: Fintechs (Square, Venmo, Cash App) sit atop regulated banks; a failure in the underlying banking layer affects the fintech front end.
• Regulatory Hurdles: Large acquisitions may face scrutiny under the 10% deposit cap rule, though regulators may grant waivers to prevent systemic failure.

Recommendations for Founders and CFOs

• Diversification is Critical: Companies should avoid concentrating capital in a single bank, especially those with high concentrations in specific industries.
  • Advice includes splitting funds across multiple accounts or institutions (e.g., Citigroup, JP Morgan, Truist).
• Use of Fintech/Abstraction Layers: Utilizing neo-banks or fintech platforms (e.g., Ramp, Brex) with instant account opening can provide immediate liquidity while underlying banking relationships are evaluated.
  • Founders should verify the actual underlying bank supporting these fintech accounts.
• Avoid Commingling Funds: Moving corporate funds to personal accounts to access liquidity is strongly advised against due to legal and tax implications.
  • Founders should open new corporate accounts immediately rather than diverting corporate assets personally.
• Information Verification: Reliance on Twitter rumors is discouraged; only the FDIC, SVB management, and potential buyers possess accurate, real-time resolution data.
  • Professionals in the room on Tasman Drive and in Washington D.C. are restricted from discussing details externally.
• Contingency Planning: Boards should conduct "bank failure" simulations, including securing printed account screenshots and ensuring data access offline.
• Market Outlook: Experts predict a buyer will be announced by the end of the weekend, with significant capital flight expected from vulnerable regional banks next week.
  • CFOs are expected to make board-level decisions regarding capital management and risk controls immediately.