To The Moon

Shares of $SVB Financial Group(SIVB)$ plunged 60% on Thursday, the biggest one-day drop on record.

Another crypto bank Silvergate Capital gave another hit - shut down its banking operations, causing the S&P 500 Banks Index to fall about 6% on Thursday.

What happened on SVB?

Technology Boom - Total Deposits Skyrocket

SVB is Silicon Valley Bank, and like the name, it provides banking services to many startups in Silicon Valley. It also means many startups have their bank accounts in SVB, which is the capital that SVB relies on.

The second half of 2020 has seen a global funding boom for technology companies, and the rapid growth in startups loans and venture capital funding has led to a huge amount of cash and deposits in the hands of technology startups.

A large portion of these deposits is flowing into SVB. In the year and a half between June 2020 and December 2021, SVB's deposits rose from $76 billion to more than $190 billion, a double increase.

The Next Step - BUY? SELL!

With the large inflow of capital, investable funds on SVB's asset side also rose rapidly. SVB's choice was to buy large amounts of U.S. debt and MBS. MBS is Mortgage-backed security, divided by available-for-sale and held-to-maturity.

In the mid of 2022, SVB increased its MBS holdings by about $80 billion, growing its holdings from just over $20 billion to $100 billion. It means SVB has about $200 billion in total assets, which is equivalent to allocating 50% of its assets to MBS. 

Along with the Fed's rapid rate hikes in 2022, these AFS assets purchased during the low interest rate period give SVB an unrealized loss in 2022.

Looking at the balance sheet, SVB's $117 billion in MBS yield 1.56-1.66% as of December 2022. However, the Fed's rate is 4.57%. 

Buy short-term treasury bonds with about a 4.5% interest rate, but deposit in the bank with 1.5%. That would make it hard to retain users.

On the other hand, the assets of these small banks are shrinking because of high interest rates, and the interest rates on loans are not keeping pace with the Fed,

In order to retain users, they are likely to have to sell some low return assets to pay interest on deposits.

Crypto-focused bank Silvergate gave another hit

Silvergate has just announced shut operations and liquidation, investors are already sensitive to the news. Once this news comes out, investors will also worry if SVB will also go bankrupt.

Such panic is like a star fire that spreads to all banks in this area at once, San Francisco bank $First Republic Bank(FRC)$ also fell by 16%! 

Is there a bank run on SVB?

The run on deposits here is not about customers lining up to withdraw cash from banks, but about customers requesting SVB to send money to some larger, safer banks such as $JPMorgan Chase(JPM)$, $Bank of America(BAC)$, $Citigroup(C)$ or $Wells Fargo(WFC)$.

When funds flow out, where do these funds go?

Once a customer has a withdrawal request, the bank's obligation to pay will result in the need to remit (reserve) to the target bank specified by the customer, thus putting pressure on its liquidity.

If there is nothing wrong with the debt of these smaller banks, the risk of shrinking deposits alone is actually relatively manageable, as they can sell their debt to larger banks to recoup their capital.

The only problem is that banks like SVB, and lend a lot of money to these startups, and once the startups appear large bankruptcy, resulting in large-scale debt default, will cause a butterfly effect leading to a chain reaction.