The day for Silicon Valley Bank (SVB), March 10, 2023, had started like every other day with the executives in communication to address the routine and specific issues of the bank while the staff went about their regular business. What was unknown to them was that in the “underworld”, I mean the world of social media, stakeholders, including individuals and organisations, were making decisions that would see the bank’s end in less than 24 hours. So, by mid-day March 10, 2023, investors and depositors had withdrawn over forty-eight billion dollars, bringing the bank to its knees. Then, as a turtle turned belly up, it floated for another 48 hours until federal regulators tipped it to a balance.
Silicon Valley Bank had run into murky waters by late 2022 due to exogenous factors of government-endorsed interest rate hikes, global inflation, diminishing growth rate in their niche market (tech industry), and internally, poor risk management leading to steep losses for a bank with asset of $211.8 billion. With equity of $ 16.0 billion, unrealised losses in securities had increased to $15 billion as of December 31, 2022, leading to a call by investors to take a look at the bank closely; a step that saw a run on its deposit leading to its failure. In confirming this position, the Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation (FDIC) are quoted to say “depositors will have access to all of their money starting Monday, March 13” and that no losses from either bank’s failure “will be borne by the taxpayer.”
SVB was a peculiar bank! A unique bank that forayed into uncharted waters. The business model was to provide financial services to tech start-ups that were denied support in the conventional banking space. Typically, traditional banks would expect any borrower to have good business history demonstrating that its business model is able to generate revenue, collateralised borrowings and even display competence and character. However, the model run by SVB was different. They preferred to base their borrowing decision on the borrower’s capacity to generate potential revenue and placed a lien on up to 50 percent of the borrower’s shares. This thinking seemed to work as the determination to own the company by founders and innovators inspired discipline in loan repayment until the lien on 50 percent equity dropped to seven percent to become the industry standard. Where there was a failure, the shares were sold to new investors, and the monies realised were used to cover any loss from the transaction.
Their primary strategy was to collect deposits from businesses financed through venture capital. With this, they are able to expand into banking and financing of venture capitalists, add services to allow the bank to keep clients as they matured from their start up phase. As the model and strategy proved potent, they fancied start-ups financed by notable venture capitalists over others. This strategy earned them control of over 50 percent of all venture-backed start-ups. In fact, as a precondition for financing, venture capitalists required start-ups to open a bank account with SVB.
Arising from the success of their model, their expansion was swift. They opened offices in thirteen states in the USA, including California and Massachusetts, identifying tech hubs. In addition, they moved into twelve international locations, including China, UK and India. To underscore the value and significance of the bank, an individual bid for the bank in 24 hours, an offer the NDIC turned down. Regional government bailed out the bank to protect their local tech industry with China confirming that the office in China was sound on March 11, 2023 while HSBC took over its operations in London and assuring the customers of safety of their deposit and investment. Their office in Santa Clara has been converted to a bridge bank called Silver Valley Bridge Bank to continue business as if nothing happened, most especially when it was realised that about 85 percent of depositors’ fund were not insured despite the fact that the FDIC had promised to cover up to $250k of depositors’ deposit.
The failure of SVB was not as shocking as the speed with which a bank that size fell. SVB is the 16th largest bank in the US. It is said to have a revenue of $7.4 billion, employees of about 8553 and a deposit base of $173.1 billion. Its net income stood at $1.751 billion as of December 31, 2022. To put this in context, the deputy governor, Financial System Stability Directorate of CBN, Aishah Ahmad, said of commercial banks in Nigeria that “notably, total assets rose to N69.67 trillion in October 2022 from N57.3 trillion in October 2021, while total deposits rose to N43.05 trillion from N36.13 trillion over the same period…”. With an exchange rate of N460 to $1.00, Nigeria’s total asset of the entire banking industry is $151 billion (about 72% of SVB), while the deposit is $93 billion (about 53% of SVB). It is claimed to be the second largest bank failure in the US after Washington Mutual (WaMu), a 118 year old bank that failed on September 28, 2008, in the wake of subprime mortgage collapse. But unlike SVB, WaMu had time to engage in aggressive publicity to gain savings to cover its dwindling liquidity before it collapsed, coupled with what experts attributed to its failure, such as rapid branch expansion resulting in planting branches in poor locations in too many markets leading it to make too many subprime mortgages to unqualified buyers. The failure was quickened by the August 2007 collapse of the secondary market for mortgage-backed securities.
When Bill Beggerstaff and Robert Medearis, both former employees of Bank of America, thought of SVB over a game of Poker and founded it on October 17, 1983, to meet the needs of a growing but easily ignored industry, it did not know that the weapon they seemed to promote would be what will make their end historic. SVB goes down the record as the first bank failure to be inspired by social media, particularly Twitter. Using technology to catalyse bank failure is novel. Just as it enhances banking experience, it is capable of bringing much pain to the bank owners as much as it delights the customers and investors. This is a good lesson for bank owners and shall form the basis to review technology impact on banks from end to end.
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