SVB Collapse an ‘Extinction-level Event’ 🪦

Yesterday, Silicon Valley Bank (SVB) was shut down by regulators in the biggest bank failure since the global financial crisis. The bank was the 16th largest in the US and was considered a financial pillar of the start-up world and the backbone of the tech industry.

The CEO of Y Combinator, the most prestigious start-up incubator in the world, called the collapse an ‘extinction-level event’ for start-ups that will set innovation back by 10 years or more. Since the FDIC only insures deposits up to $250,000, the majority of these start-ups are left unable to make payroll. As a result, the collapse is expected to lead to mass layoffs and thousands of start-ups collapsing.

According to NPR, Shopify, Pinterest, Fitbit, Roku, and Andreessen Horowitz are among a few of the well-known tech companies that banked with SVB, but this list only scratches the surface as SVB previously claimed that nearly half of all US technology and healthcare companies that went public last year were SVB customers.

How did this happen? 🤯

This is shocking news, but perhaps more shocking was how quickly SVB collapsed - how could the 16th largest bank fall apart in only 48 hours? Here’s the breakdown:

• Over the past year, the Fed has aggressively raised interest rates to fight inflation

• Many of SVB deposits were tied up in long-term bonds that SVB locked in during the era of near-zero interest rates. SVB’s $21B bond portfolio was yielding only 1.79% compared to the current 10-year Treasury yield of 3.9%.

• At the same time, venture capital has dried up, causing start-ups to burn cash more quickly than SVB expected, resulting in fewer deposits as fewer start-ups were able to raise additional cash.

• Fewer deposits and more withdrawals caused a liquidity crunch for SVB, causing them to sell some of their bond portfolio at a massive $1.8B loss to come up with the money to cover deposits

• This caused rumors to swirl that SVB was facing huge interest rate risk on their larger bond portfolio, causing panic and accelerating withdrawals

• This caused a vicious cycle of SVB having to sell bonds at a loss to cover the deposits

• SVB tried and failed to raise additional capital and sell to a larger bank

• Finally, on Friday, SVB failed and was taken over by the US Federal Deposit Insurance Corporation (FDIC) - an independent agency created by Congress to maintain stability in the US financial system.

Will this cause contagion? 😨

While the collapse of SVB will cause huge pain across start-ups and the tech sector, banking experts say there is little chance of the chaos spreading to the broader banking sector as it did in the months leading up to the Great Recession. Unlike the big banks, SVB was heavily dependent on a single risky area of the economy for its deposits. The tech-friendly bank lacked the sophisticated entanglements with other institutions that were present in the 2008 crisis.

The White House has rushed to reassure the public with Cecilia Rouse, chair of the White House Council of Economic Advisers saying "our banking system is in a fundamentally different place than it was, you know, a decade ago, The reforms that were put in place back then really provide the kind of resilience that we'd like to see."

Despite this, the collapse has led to a continent-wide selloff in financial stocks with Canada’s top banks losing ~$20B in market value over the last 4 days. Many large Canadian banks have acquired regional U.S. banks in recent years, increasing their exposure to the banking fallout from the failure of Silicon Valley Bank. Overall though, the Canadian banks are assuring investors that “liquidity positions across the Canadian banks are strong” and that the impact from the SVB fallout will be limited.

Crypto: in trouble or the solution? 🤔

Despite being positioned as an alternative to the banking system, many crypto firms have also been impacted by the SVB collapse.

Most notably, stablecoin USDC has lost its peg to the US Dollar after the company revealed that nearly 8% of its reserves were tied up in SVB. The stablecoin, which is designed to trade at $1, fell below 87 cents today. If USDC holders get spooked, it could cause a further collapse of the coin.

Some crypto advocates say the collapse is evidence that “fiat is fragile” and say this is an opportunity to consider the benefits of decentralization.

#MyStory Giveaway on Blossom 🤑

If you missed Brandon’s post last week, over the course of March we’re running a fun giveaway in the community. You can win Blossom Merch and access to Brandon’s Investing Academy (over $2,000 value)!

To enter just share a post with a photo of yourself (and your family) sharing your investing story!

Here are some of our favourite posts so far:

🗞️ What else you might’ve missed:

• Fed Chair Jerome Powel says the Fed is likely to raise interest rates

• The Bank of Canada holds interest rates unchanged for the first time in 9 meetings

• Loyalty Ventures, the owner of Air Miles, files for bankruptcy

• Top executives of Canada's grocery stores say they aren’t causing food inflation

• Salesforce launches a $250M fund for generative AI start-ups