Thread by @SnowfishTrading

🆘SVB Financial $SIVB collapse explained 🥵

~ Just 24 hours ago $SIVB was trading at over $260/share it hit a low of $33.40 today
~ It is currently halted after being shut down by regulators & taken over by the FDIC
~ Largest bank failure since 2008
#banks #financialcrisis
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🚨 What happened? Here's the $SIVB story

~ Silicon Valley Bank parent company SVB Financial Group has collapsed after disclosing large losses from securities sales & a stock offering meant to provide a boost to its balance sheet

#BankCrash
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⏺️ $SIVB helps fund technology startups backed by venture-capital firms
~ Rising interest rates, fears of a recession & a slowdown in the market for initial public offerings has made it harder for early-stage companies to raise cash
~ This led firms to draw down on their deposits

⏺️ When banks accept deposits from clients, they owe the client that money- so deposits are liabilities to the bank

Liabilities 👇
~ Branches, Employees, Tools to access the money etc.
~ Interest the bank pays you to keep the money there

#banks #FDIC #SiliconValleyBank

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⏺️To pay those cost of liabilities #banks try turning them into assets:

- Lending on deposits: Small business loans, Mortgages, Commercial & Industrial loans

-If a bank can’t lend on deposits, it will buy loans or securities like US Treasuries & Mortgage Backed Securities
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$SIVB was thriving with low credit losses as its deposits tripled from 2019 to 2021 📈

- During that same period there were 1,747 IPOs
- IPO have looked much different since 2022, non-existent really due to high inflation, raising interest rates & a recession looming
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🤔You would think large deposits is a good problem to have right?

Not so much if you can't cover your cost of those balances! Remember banks need to lend to cover their cost

$SIVB needed to take those funds & acquire assets it couldn’t lend responsibly as fast as it came in
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⏺️ $SIVB deposits came from VC backed companies - big deposits!
*Keep in mind #FDIC insurance only insures $250,000 per customer per bank*

~ Rather than approving irresponsible loans $SIVB bought assets guaranteed by the US government- Treasuries & Mortgage Backed Securities
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🚧BUT $SIVB bought long duration assets +10year bonds/treasuries

👉When rates rise, fixed income prices fall
General rule of thumb for every 1yr of “duration" each 1% interest rate move impacts the bond price by 1% x Duration

1% move on a 9yr duration bond= +/- 9% of bond price

Now add leverage to that! 👀

#Banks like $SIVB are levered 10:1 or more: owing $10+ for every $1 of shareholder equity

If you’re levered 10x, a 10% loss on assets can wipe you out🤯

#bankcrisis #marketcrash
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⏺️ $SIVB bought a ton of high quality assets with long duration at low interest rates BUT with the Fed raising rates (from 0 to 4.50%) those assets declined in value…1% x Duration

Those losses multiplied through leverage causing a huge problem!

#bankcrisis #BankCrash
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🚨 Now $SIVB has a big mark-to-market hole in its balance sheet👇

~ Which is fine as long as depositors leave their money and they raise capital elsewhere for instance through securities sales/stock offerings etc

#FDIC #bankcrash #SiliconValleyBank
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🗣️What if all depositors ask for their money back at once tho? 🤯

🆘 $SIVB would need to sell those bonds at mark-to-market value crystallizing what may have been a temporary loss

And if those losses are big enough they may not have enough money to pay out all depositors
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⏺️Brings us to this week...

~ 86% of $SIVB depositors aren’t fully #FDIC insured
~ As deposits go in reverse, banks have to sell assets to raise money
~ Causing a bank run. Last customer to get to the bank loses😢

↪️ What would you do?

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