The Silicon Valley Bank Collapse

What caused Silicon Valley Bank to collapse in March 2023?

Silicon Valley Bank (SVB) collapsed due to a bank run. Many banks cannot retain financial solvency if all of their depositors withdraw all their assets rapidly.

• SVB was operating with a ‘duration mismatch’ - they borrowed from investors short term while buying almost entirely long-term bonds (which is a bet towards stable interest rates).

• High federal interest rates imposed to fight inflation in 2022 made the assets of SVB devalue - if they were forced to sell rather than riding it out long-term.

• The speed of information + technology has increased rapidly. Fear spread much more quickly than in the past through social media, and people were able to move assets remotely in a post-Covid, cloud based world - both made the severity and speed of the bank run unprecedented.

• Large scale depositors - 96% of SVB deposits were over $250k at close of 2022 - the cap at which the FDIC will ensure a deposit. This made investors fear losing their assets permanently.

How is this different from the 2008 market collapse?

• Most importantly: The FDIC is in receivership for SVB - the FDIC itself will pay back depositors, bolstered by selling some of the bank’s physical assets. In 2008 the bailout was funded by TARP - Troubled Asset Relief Program - which was taxpayer funded.

• The FDIC has promised to fully repay all deposits to SVB and Signature Bank (a New York-based small bank which collapsed recently) which eases fears of a bank run - there’s no need to withdraw all your assets if you’re guaranteed them no matter what happens to the bank.

• Greater regulations in place since 2008 includes higher capital requirements for all major banks resulting in increased bank resiliency in the face of a bank run. This remains true for all large-scale financial institutions.

• SVB was a unique bank - it serviced (almost exclusively) VC funds and tech startups - companies that by their very nature do not have strong risk profiles. All of the major financial institutions have much more diversified risk, and mortgages - which fueled the 2008 collapse - were much more common as an asset than the tech / VC assets serviced by SVB.

How could this impact Bay Area Nonprofits?

• The SVB collapse could lead to a decline in the entire tech sector and Bay Area venture capital funding them. Tech companies are a significant source of donations and grants for many nonprofits, so a decrease in their financial health could also lead to a decrease in their philanthropic activity.

• This could also decrease the assets available to individual donors. Many Bay Area tech and startup companies share the progressive values of local nonprofits and are involved with them on an individual level, either through funding or other avenues of support.

• If the collapse of SVB leads to a decline in overall funding available for nonprofits in the Bay Area, this could lead to increased competition for the remaining resources. Nonprofits may need to work harder to differentiate themselves and demonstrate their impact in order to attract funding.

• In the event this collapse has an impact on the economy in general, it could actually lead to an increase in Bay Area nonprofit activity. Community supported programs for housing, food, education, and other resources would be critical to help local economies negatively effected downstream of a larger tech industry collapse.

Takeaways:

• So far, all financial systems and tools used by and surrounding Sutro Li remain functional and intact.

• A collapse like this could potentially occur at other local and regional institutions not subject to the higher capital requirements in place since 2008

  • It is unclear if the FDIC would be able to assure full repayment of all assets not protected by their traditional insurance limits.

  • It remains good practice to diversify locally deposited assets and keep those deposits under the FDIC $250k limit.

• Diversity is strength! This is true in almost any system. Nonprofits should diversify their relationships with financial institutions instead of relying on one, and keep some source of reserve capital or assets to leverage in the event of financial instability. They should also diversify their funding sources to avoid relying on a single volatile industry.

• How Sutro Li can help: having a reliable, relatable source of financial advice can help navigate decisions at times like these.

  • We have a unique vantage point through our work with many clients, and will be applying what we learn as a number of our clients encounter similar obstacles related to transferring funds.

  • Strategies like diversifying your deposits can feel complicated and are not our first advice in all cases. We can help you evaluate the pros and cons related to different asset allocations.

  • Reach out for more suggestions and resources related to this article or FDIC Insurace, we would be happy to speak with you.