SVB : The Bank From Planet ZIRP ... A focus on deposits.
SVB deposits had increased from $49 billion dollars in 2018, to $189 billion dollars by the end of 2021. "Hot money" of course, two thirds of the deposits were non interest bearing demand deposits. Over 90% were above $250,000 and not insured under FDIC rules.
Deposits increased from $49 billion to $62 billion by the end of 2019, as the Fed eased base rates to 1.75% from 2.00% in the year. In the following year, the Fed dropped rates to 0.1%. Deposits soared to $102 billion in 2020 and $189 billion at the end of 2021.
SVB's rapid growth created several stresses. The bank had to invest substantial cash deposits at a time of rock-bottom interest rates. To maximise returns, the company purchased longer-term mortgage and government-backed securities paying higher interest but of longer duration
But time was up for interest rates at the zero bound. The flight from Plant ZIRP was brought onto the runway. In 2022 the Fed began to hike rates aggressively. Rates moved from 0.1% to 4% by the end of 2022.
In that year, SVB deposits fell by $16 billion as investors were lured away by the prospect of higher yields. It was a harbinger of problems to follow for the bank in 2023.
In December 2022 The Federal Reserve Board forecast assumptions were for rates to average 5.1% in 2023, falling to 4.6% in 2024, 4.1% in 2024 and 3.1% in 2025. The long run rate thereafter would be for rates to average 2.5%.
Our basic log model would suggest SVB deposits would fall by a further $40 billion over the next two years and $10 billion in 2025 before stabilising at around the $120 billion level. The balance sheet impairment would provide further write downs of around $4 billion before some write back was possible. Total Equity would take a further big hit.
Depositors would not wait. By the close of business on March 9th, customers had withdrawn $42 billion dollars. A further $100 billion was up for withdrawal the following day. The Bank had run out of cash and options. Silicon Valley Bank was placed into receivership..
Major depositors included Roblox and Roku. Roblox (RBLX.N) The online gaming firm says about 5% of its $3 billion cash and securities balance, or about $150 million, as of Feb. 28 were held with SVB. Roku (ROKU.O) The streaming devices maker says it has about $487 million, or 26% of its cash and cash equivalents, held in deposits with SVB.
The Risk Model Flashed Red ... So Executives changed it.
An internal model showed that higher interest rates could have a devastating impact on the bank's future earnings.
Instead of heeding the warning, SVB executives simply changed the model's assumptions, according to the former employees and securities filings. The tweaks, which have not been previously reported, predicted that rising interest rates would have minimal impact on deposits and revenue.
The new assumptions validated SVB's profit-driven strategy but they were profoundly misplaced. Over the past year, interest rates had climbed nearly four percentage points, the fastest pace since the 1980s. The tech industry has entered a post-pandemic swoon, causing SVB's elite clientele to withdraw cash far faster than bank executives had expected.
The episode shows that executives knew early on that higher interest rates could jeopardise the bank's future earnings. Instead of shifting course to mitigate that risk, they doubled down on a strategy to deliver near-term profits, displaying an appetite for risk that set the stage for SVB's stunning meltdown.
SVB's new projections took effect during the year and assumed that cash flow from deposits would stay consistent for longer, softening the projected bite of higher interest rates. Before changing the model, an interest-rate hike of two percentage points would drop a measure of future cash flows by more than 27 percent; afterward, the hit was less than 5 percent, according to the bank''s securities filings.
In an apparent bet that interest rates would go down last fall, SVB sold for a profit the financial instruments it used to hedge against the risk of higher rates. Instead, the opposite happened: The Federal Reserve began to raise interest rates more aggressively over the summer to tamp down inflation. That reduced the value of SVB's securities portfolio, meaning the bank would take a loss if it had to sell.
Silicon Valley's Risk Model Flashed Red ... So Executives changed it. Washington Post April 2
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