Evening Brief – 03.10.23

Shares of Silicon Valley Bank’s parent company SVB Financial Group plummeted 60% on Thursday, another 20+% in after-hours trading, then a trading halt on Friday, wiping out more than $80 billion from its market capitalization, culminating with a shutdown by regulators and control by the FDIC.

Silicon Valley Bank was known for its investments in what has now been deemed bubbly tech, and as the Fed continues its aggressive monetary policy stance much of the capital and liquidity that was there is leaving the system.

The bank’s investments were heavily concentrated in mortgage-backed securities. But not just any type of MBS – about 97% of them were 10-year maturity MBS that the bank planned to hold until maturity.

At the time, the investments made sense as US Treasuries were providing a 0-0.25% return, while the MBS products had a yield above 1.5%.

The fact is the lifeblood – capital – for innovative firms, fintech companies among them, is going to be a bit harder to come by now. The same businesses that were key clients of Silicon Valley Bank – venture capital-backed tech and life sciences startups made up about 50% of the bank’s assets – had been drawing down on their deposits.

SVB is not exclusive to these events. Numerous US banks are in a similar situation. They are all holding long-duration assets that were bought in a zero-interest rate environment and now those assets are theoretically under water. Although it’s not necessarily systemic contagion, sentiment contagion could be just as damaging or even more damaging to the financial markets.