Silicon Valley Bank - A Q&A on the Bank Collapse

Silicon Valley Bank (SVB) is a California-based bank that had considerable exposure to the venture capital, or VC, industry. Over the past two years, the bank’s balance sheet expanded rapidly. VC companies had deposited cash with the bank, which then bought government bonds and mortgage-backed securities with that cash. Loan demand was not strong. So the bank invested in financial instruments instead of lending. 

Problems arose when the VC firms recently asked for their deposits back because of cash-flow problems and the challenges faced by the technology industry in the past six months. To refund deposits, SVB was forced to sell some bond holdings. Due to the decline in bond values in the past 12 months, these sales resulted in a US$1.5 billion loss on those investments. On Thursday, when this loss was revealed, SVB’s stock price fell 60% as the bank tried to raise capital to cover those losses. The stock fell another 60% on Friday before the company stock was suspended from trading and regulators and the Federal Deposit Insurance Company (FDIC) closed the bank. This is the largest bank failure in the world since 2008. 

The FDIC insures deposits up to a maximum of US$250,000 per depositor. In a move designed to protect confidence in the country’s financial institutions, the government announced that all deposits with SVB will be guaranteed regardless of dollar value. The announcement means depositors will now be able to access all of their funds. Given most of SVB’s clients are companies, this alleviates concerns of short-term funding for these businesses. 

CFS products have immaterial exposure to SVB. The Lifestage investment option has a small exposure to SVB through BlackRock, which runs a quantitative strategy. This exposure is not large enough to have a material impact on performance.