A CASE STUDY ON COLAPSE OF SILICON VALLEY BANK

1. COLLAPSE OF THE
SILICON VALLEY BANK
GROUP MEMBERS:
ABHISEK PADHI
ABHINAV RAJ
DURGESH SONWAL
KURLEKAR OMKAR
SHIWANGI
KUNWAR ADARSH
JAI BHAGAT
GAURAV ANAND
ABHAY RAJ

2. • Our topic for the presentation is very fresh and challenging for the international
market. Any guess? - It is the ‘Collapse of the Silicon Valley Bank’.
• First, we will go through the history of the bank and further we will discuss the
following key points -
• factors that contributed to its success in the 1990s and early 2000s
• the events that led up to SVB's collapse.
• effects of SVB's collapse on the tech industry and the broader economy.
• the aftermath of the collapse, such as the acquisition of the bank by another
institution.
• the key takeaways from the SVB collapse, including the importance of effective risk
management.

3. • Discuss the history and growth of SVB, including its business model
and customer base.
• Silicon Valley Bank (SVB) was founded in 1983 in Santa Clara, California, with the aim of providing banking services to
technology startups and venture.
• capitalists in the Silicon Valley region. At the time, traditional banks were hesitant to work with these types of clients due to
their higher risk profiles and unique financial needs.
• In its early years, SVB focused on building relationships with emerging technology companies in the region, offering a
range of services including cash management, credit, and financing for equipment and real estate. As the tech industry in
Silicon Valley continued to grow and thrive, SVB's customer base expanded to include not only startups, but also
established technology firms, venture capital firms, private equity firms, and life science companies.
• SVB's business model is built on providing specialized financial services tailored to the needs of its clients. The bank has
deep expertise in the technology and life science sectors and uses this knowledge to develop customized financial
solutions that help its clients grow and succeed. SVB has also been a pioneer in online banking, offering digital tools and
services that make it easy for clients to manage their finances remotely.
• Over the years, SVB has expanded beyond Silicon Valley to serve technology and life science companies in other regions
of the United States, as well as in key international markets such as the UK, China, and Israel. Today, SVB is one of the
largest banks in the United States focused on serving the innovation economy, with over 30 offices worldwide and more
than $100 billion in assets under management.

4.  Its focus was on serving the unique needs of technology and innovation-focused
companies.
 Its early adoption of online banking and other technological innovations.
 Its ability to attract and retain top talent in the banking and technology industries.
 Its strong relationships with venture capitalists and other key players in the
innovation ecosystem.
 Its expansion into international markets and the development of specialized services
for global innovation companies.
 Its conservative lending practices, helped it weather economic downturns and
emerge as a strong player in the industry.
Factors that contributed to the success of the SVB:

5. •Various financial crises it faced
• 1990’s real estate bubble burst - Under Smith's leadership, the bank diversified into the high-risk real estate loan
business, which amounted to 50% of its portfolio. When the 1990’s real estate bubble burst, SVB faced 2.2m $ loss. Many
startups had also invested in real estate heavily during that period so when it all came down they couldn’t repay their loans.
• Dot com bubble burst -
● In the early 1990's the internet as we know it today didn’t exist.
● Only after the release of the “Mosaic” web browser, the internet became public, hence giving birth to whole new possibilities in
the B2C tech sector.
● Some Reasons of bubble formation:
○ Absurd overvaluations of dot-coms- due to soaring demand and a lack of appropriate valuation models, IPOs were excessively
overvalued.(traffic on page was evaluated rather than real profit)
○ Surplus of venture capital - Money pouring into dot-coms by venture capitalists - other investors accessing capital through very low-
interest rates - also, the Taxpayer Relief Act of 1997 lowered the top marginal capital gains tax in the U.S. & made people even more willing to
make speculative investments

6. ● Why did the bubble burst?
○ Rising interest rates: Federal Reserve raised the fed funds rate several times during 1999 – 2000; motivated investors to move money
out of more speculative assets (like internet company stocks) and into interest-paying assets like bonds.
○ Onset of a recession in Japan in March of 2000: news spread fast & led to a worldwide selloff, moving more money out of
speculative equities to fixed-income instruments like bonds.
○ Concerns about the Y2K problem - spending on technology was volatile as worries mounted that computer systems would have
trouble changing their clock and calendar systems from 1999 to 2000
○ Twin tower attack in 2001 - made the situation worse.
Outcome:
● Several online and technology entities declared bankruptcy and faced liquidation like Pets.com, Webvan,
360Networks, Boo.com, eToys, etc.
● 4 in every 5 startups at that time perished.
● However, other internet based companies struggled but survived and are giants today, notably Microsoft, Amazon,
eBay, Qualcomm, Cisco etc.
● General public were the most aggressive investors
● 100 million individual investors had lost a collective $5 trillion in the stock market - a Vanguard study showed that by
the end of 2002, 70% of investors had lost at least one-fifth of their worth, and 45% had lost more than one-fifth
● For SVB, being majorly focused on these startups, stock fell almost 50% in value.

7. How did SVB overcome this crises?
• SVB had built a deep network of relationships with technology
entrepreneurs and investors. This allowed the bank to identify promising
companies and provide them with financing, even during the height of the
bubble.
• SVB had a strong balance sheet and was well-capitalized. It had been
conservative in its lending practices, avoiding many of the riskier
investments that other banks had made during the bubble.
• As the Dot-com bubble burst, the bank shifted its focus towards more
established technology companies and away from the riskier startup
investments that had fueled the bubble.
• Government bailout was not there, and other interferences were
insignificant unlike the 2023 crisis.

9. Events that caused recent collapse of SVB
There are two major reason behind this:
i)Heavy loss in the bond portfolio of SVB
ii)Bank run
How did this happen?
1)Let us have a look in to the balance sheet of the firm. Well it looks diversified just like any bank.
2)Let us have a look into the deposits. The deposits went up more than thrice in 2019-2021. This was due to Covid-19. Interest
rates were lowered to 0.5%, so the businesses can thrive.
3)SVB decided to invest these deposits in securities (77% in HTM,21% in AFS). The interest rates were lower and fund managers
anticipated that it would continue to do so.
4)In the period of 2017-19 they generally invested around 50% in HTM and AFS.
5)Then in March of 2022 Russia-Ukraine war started off , inflation rates started to rise ,FED exercised it by increasing the interest
rates. As war never stopped, geopolitical tensions rose and interest rates spiked.
6)The bond portfolio of SVB bled(bond value drops as interest rates rise) as majority of investments were in HTM securities they
were unable to sell it. SVB thought tensions would ease and interest rates will drop but that never happened.
7)Venture capital firms and PE firms got information about this and urged the startups to withdraw their money. In order to pay
for it SVB realized losses of $1.8 bn by selling portion of portfolio.
8)Then to cover it SVB offered common stocks in primary market to raise $1.5 bn but failed miserably. Majority of depositors
were above the cap of $250K.(well its not insured by government)
9)This led to panic and bank run. Depositors rushed to withdraw and bank provided for it by selling its already making loss
portfolio.
10)These series of occurrences led to the breakdown of SVB.

14. • Discuss other contributing factors , such as regulatory issue and management problem causing SVB
collapse.
• There are many internal reason and regulatory issue that caused the collapse of SVB bank .
• (1) SVB has no chief risk officer (CRO) for nearly 8 months and whether this played a role in any possible risk
management or control failure is suspicious.
• (2)potential insider sales of stock, Greg Becker which was chief executive of SILICON VALLEY BANK sold $3.6
million in stock before 10 days of bank collapse.
• (3)poor risk management of bank, although all bank in USA are facing interest rate hike, but SVB choose to
ignore the warning that causes collapse of this bank.
• (4)internal audit also plays a critical role because it contributes to the effectiveness of a bank’s governance
practices. Banks need to provide internal auditors the necessary tool and access to the data , so they can
objectively assess risk management and control processes across the organization.
• (5)exposure to crypto currency: US cryptocurrency firm “circle” has $3.3 billion of its $40 billion reserve, so
dollar start depreciating because holders start to withdraw their asset, it also a reason that created a panic
situation and resulted in falling of share price of bank.

15. • In general, the collapse of the SVB had significant implications on the broader
transaction banking industry, as it affected the confidence and stability of the financial
system as a whole,These include:
■ Loss of trust and confidence: A bank collapse can lead to a loss of trust and confidence in the broader banking system, as customers and
investors may become more hesitant to engage in transactions with other banks. SVB has shaken the confidence of an industry already
grappling with rising interest rates and stubbornly high inflation.
■ Systemic risk and Market volatility: A bank collapse can potentially trigger a domino effect on other banks and financial institutions, leading to
a broader systemic risk. This is especially true if the failed bank had significant interbank connections and exposure to other financial institutions.
The collapse of a bank can lead to market volatility and uncertainty, as investors may react to the news and sell off their shares in other banks or
financial institutions. This was observed after the collapse of the Silicon Valley Bank. As several banks like Credit Suisse and Signature
banks collapsed just after the collapse of the SVB bank.
■ Disruption to transaction banking: Customers mainly the tech startups who have accounts or transactions with the SVB bank are
experiencing disruption to their services, which can impact their ability to conduct business and engage in transactions with other banks. This is
the most important impact of the collapse of the SVB as SVB was the leader in so-called venture debt, providing loans to risky early-stage
companies in software, drug development and other areas like robotics and climate-tech.
• In the absence of venture funding, money-losing startups have had to cut their burn rates in order to extend their cash runway. Since
the beginning of 2022, roughly 1,500 tech companies have laid off a total of close to 300,000 people. And now after the collapse of the
SVB this figure is expected to increase even more because of the funding shortages.

16. • Explain how it affected the bank's customers, employees, and
investors.
• Customers: The US government assured all the Insured depositors with up to $250,000 in their
accounts will be able to access their money.
• However, a majority of deposits are not insured, Federal Deposit Insurance Corp (FDIC) will pay
uninsured depositors an advanced dividend in a week. They will also be given a receivership certificate
for the remaining amount of their uninsured funds.
• Employees: The FDIC took over the bank and had offered the employees 45 days of employment at 1.5
times their salary. They have been told to continue working remotely - except for essential workers
and branch employees.
• For Employee Retention, they would be enrolled and given information about benefits over the
weekend. Healthcare.
• Investors: The failure of Silicon Valley Bank resulted in a decrease in the appetite for risk among
investors as they suffered decline.
• It had led investors to panic and start pulling out their money from SVB to meet their liquidity needs.

17. • The aftermath of the collapse, such as the acquisition of the bank by
another institution.
 Silicon Valley Bank started raising money from investors to recover the losses registered due selling of government bonds at lower
prices, but this sent a chaos to its consumers and venture capitalists about their money and investments resulting in high withdrawals
(about $42 billion in one day). Their stocks dipped to about 80% in a week.
 Silicon Valley Bank was rendered out of cash and then the Federal Deposit Insurance Corporation (FDIC) stepped in to acquire its
customers’ funds summing over $174 billion and created Deposits Insurance National Bank of Santa Clara to hold the deposits and
other assets (~$209 billion) of SVB.
 They ensured that all the insured depositors will have full access to their insured deposits and the uninsured depositors (~89%) receive
their payments on a dividend basis.
 The insolvency declared by the American Regulatory also affected the Silicon Valley Bank UK and in a turn of events HSBC bought
SVB UK for £1.
 This collapse affected many tech startups and companies directly and indirectly associated with SVB, but it could have been much
worse had the government not stepped in and let the bank face consequences of its own financial decisions.

18. 1. Summarize the key takeaways from the SVB collapse, including the importance of effective risk
management and diversification.
• Silicon Valley Bank's failure is a stark reminder for other financial institutions that when a crisis occurs, it can spread rapidly.
• The collapse of SVB, a large investment bank, highlighted the importance of effective risk management and diversification.
Some key takeaways from this event include:
 Lack of diversification: SVB did not adequately diversify its investments, which meant that its losses were magnified.
 Inadequate risk management: SVB's risk management systems and processes were not robust enough to identify and
mitigate potential risks.
 Transparency and communication are important: SVB's lack of transparency and communication with investors and
stakeholders contributed to the severity of the collapse. Clear and open communication is crucial for maintaining trust and
confidence.
 Importance of stress testing: SVB did not effectively stress test its portfolio, which could have helped identify weaknesses
in its risk management strategies.
 Consequences of overconfidence: SVB's leadership exhibited overconfidence in their investment decisions, which may
have contributed to the lack of diversification and risk management failures.
• The collapse of Silicon Valley Bank highlights the fatal impact of market risk, which can hit any business or industry very
quickly. This emphasises the need for efficient asset-liability management and proactive risk management policies.

19. • Discuss how the lessons learned from this event can inform best practices for banking and investing in the
future.
 Diversification: Investors should aim to diversify their investments across multiple asset classes and industries
to reduce their exposure to individual risks. This can help mitigate losses and stabilize returns in a volatile
market.
 Risk Management: Financial institutions should have robust risk management strategies and systems in place
to identify, measure, monitor, and mitigate risks. This includes stress testing portfolios to identify potential
weaknesses and addressing them before they become significant problems.
 Avoiding Overconfidence: Financial institutions should avoid overconfidence and be realistic about their
investment decisions. Investors and financial institutions should always be aware of the limitations of their
knowledge and expertise and seek outside opinions and perspectives when making significant investment
decisions.
 Continuous Learning and Improvement: Investors and financial institutions should continuously learn from
their experiences, successes, and failures to improve their investment strategies and decision-making processes.
 Regulations and Oversight: The collapse of SVB demonstrated the need for strong regulatory oversight of
financial institutions. Regulatory bodies must ensure that banks and investors are adhering to best practices and
managing risks effectively.