And that is how the cookie crumbles: Understanding the global banking events, starting with one phone call

Short date-wise summary of events

In the middle of the week (8th March or thereabouts), a rating agency called Moody’s called up Silicon Valley Bank (SVB) – a 40-year old bank that specialised in start-ups and Venture Capital funding, and informed them that they are going to downgrade their rating.

This is a timeline from that day:

10th March – Silicon Valley Bank was closed by the US Government. A government body called Federal Deposit Insurance Corporation (FDIC) took control of the bank’s assets and ensured that every depositor will get at least 250,000 dollars of their deposits in the bank.

This news led to a run on the bank on Signature Bank in New York.

12th March – Signature Bank shuts down and is taken over by the US government.

13 March – The first lawsuit is filed against SVB by a shareholder. The suit was filed by Chandra Vanipenta, seeking a class-action status for shareholders. The suit was filed against the bank, CEO Greg Becker, and CFO Daniel Beck. (This lawsuit is now a class-action suit).

14 March – The UK arm of SVB is sold to HSBC for one GBP.

This means that the shareholders of SVB lost a large part of their business value.

On the same day, Moody’s put 6 more banks on a watch list.

Why did this happen?

Detailed report by Hima Sutha

What is the Silicon Valley Bank (SVB), and how “Startups” are different from regular
businesses

Located in California’s Santa Clara and ranked as the 16th largest bank in the United States,
Silicon Valley Bank (SVB) was a commercial bank that failed on March 10th, 2023.

Commercial banks give loans to small and big clients (general population, small companies, big companies, etc.) and collect deposits (money savings) from their clients.

SVB has the largest deposits in Silicon Valley. Situated on the east coast of California, Silicon Valley is the hub for numerous technological innovations and innovative startups. Apple, Google, Zoom, Adobe, Uber, etc., are all headquartered in Silicon Valley.

SVB’s main business is startups and the people who fund startups – venture capitalists.

It was the most prominent public bank in California that focused on startups as its primary clients.

What are Start-ups?

Startups are companies that are newly launched in the market. Their products focus on addressing the target customer’s pain point and entering the market to grow rapidly,
alongside acquiring many customers over the long run.

Many startups aim to become publicly traded companies in the long run. While starting out, startups generally raise money to build their products from Venture Capital firms (firms that invest money in companies that currently may or may not have a product but the product they intend to offer has a product-market fit). 

The SVB connection

SVB provided the Startup banking option; approximately 50% of the tech-based and life science- based startups in the US that received funding from Venture Capital firms (VCs) saved the funding raised at SVB and used their banking services. SVB also provided loans to growing
startups to help them grow faster.

How Bond yields affect banks and why banks need to keep surplus funds in investments rather than putting all their assets into loans

Commercial banks such as SVB accept deposits (money from their clients and pay them interest
for a few deposits) and give debts to a few clients (startups, publicly traded companies, etc.).

Since these banks have cash flowing in and out of their bank, they need to hold money in the
bank or invest in assets (make purchases in stocks or goods, etc.) that can be easily converted
into cash.

SVB has clients such as Asha and Bijoy, who they work with to run the bank and earn profits
that could be distributed among their employees.

Therefore, to deliver its clients like Asha their money when they come to withdraw their deposits
or grant loans to their clients, banks need to ensure they have surplus money with them.

On a general note, according to the Fed’s rules, banks must keep at least 10% of their deposits in the
bank to maintain liquidity. This would help them meet the demands of both their depositors like
Asha and the loan borrowers like Bijoy.

In addition, having excess deposits strengthens the bank’s reputation making it a safe place for deposits.

The Bond Story

Many companies and governments issue bonds to raise money for their activities that require more money than they currently have.

For example, governments usually issue bonds when they want to raise money for their day-to-day operations or projects they want to start. When an individual buys a bond from the government or a company, the payment goes to the bond issuer as a loan – who then pays back to the lender the interest for borrowing the money along with the initial payment (face value).

The issued bonds have interest rates that change according to economic conditions. At times, instead of interest rates, the bond issuer can give the lender coupon payments (a payment that will be paid regularly until the initial payment is made to the lender).
Here’s an image of what a bond looks like and a timeline of how the process works:

Part 1 of the series. The next parts will be published soon.