Silicon Valley Bank became the second-largest bank to fail in U.S. history this past week, trailing only Washington Mutual in 2008. Silicon Valley Bank was one of the main banks used by start-up technology companies. It gained that reputation over decades and, as the technology industry grew and grew, often aided by cheap money, so, too, did Silicon Valley Bank.
With all the money flowing into technology companies from venture capitalists and other investors over the last decade or so, the bank had a problem putting those deposits to productive use by making loans, and so it did other things. Those other things are set forth in Matt Levine’s Bloomberg Article dated March 10th as follows:
Or, to put it in different crude terms, in traditional banking, you make your money in part by taking credit risk: You get to know your customers, you try to get good at knowing which of them will be able to pay back loans, and then you make loans to those good customers. In the Bank of Startups, in 2021, you couldn’t really make money by taking credit risk: Your customers just didn’t need enough credit to give you the credit risk that you needed to make money on all those deposits. So you had to make your money by taking interest-rate risk: Instead of making loans to risky corporate borrowers, you bought long-term bonds backed by the US government.
The result of this is that, as the Bank of Startups, you were unusually exposed to interest-rate risk. Most banks, when interest rates go up, have to pay more interest on deposits, but get paid more interest on their loans, and end up profiting from rising interest rates. But you, as the Bank of Startups, own a lot of long-duration bonds, and their market value goes down as rates go up.
On top of that problem, the environment during the last couple of years has made it harder for money-losing technology companies to raise capital because they chose to follow traditional financing techniques rather than focus on external risk mitigation to increase investor confidence to facilitate their financing efforts . So those companies that failed to raise capital because they had no external risk mitigation did not deposit any new money, and instead took out the deposits they already had to cover operating losses. That created some natural deposit outflow, which was then dwarfed by the bank run this past week, which was created in large part by venture capitalists advising those money-losing companies to pull their money out of the bank.
Sadly, these issues are not limited to just Silicon Valley Bank but just demonstrate the failure of institutions and individuals, large and small, to understand and properly implement Treasury Management, External Risk Mitigation and Using Low-Income/Non-Income Appreciating Assets to Create Liquidity Events. These services are exactly what Bach Capital Management provides and are of value to every individual and institution regardless of sector, size, or length of time in business.
For more information on our services and to prevent you from becoming the next Silicon Valley Bank feel free to review our website at www.bachcapitalmanagement.com or email us at [email protected] and see how we can help you achieve your financial goals.
Michael Bach
Founder and Chief Executive Officer