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We normally don’t share commentary in our Friday Wrap series of articles but the current situation with Silicon Valley Bank (SIVB) was shocking enough that we decided to dedicate a section of the Friday Wrap to the crisis.
There are certain banks that are designated as Global Systemically Important Banks or G-SIBs. These are essentially “too big to fail” banks and financial institutions where the failure of one bank can lead to a domino effect and potentially cascading failures. JP Morgan (JPM), Bank of America (BAC), Citigroup (C), Bank of China, Deutsche Bank, Credit Suisse and Royal Bank of Canada are some example of G-SIBs. You can find the full list of 2022 G-SIBs here.
Then you have the list of Domestic Systemically Important Banks or D-SIBs that includes institutions like Ally Financial, American Express, Capital One, Truist, KeyCorp and Zions to name a few.
Silicon Valley Bank (SIVB) was neither a G-SIB or D-SIB but it was the 16th largest bank in the U.S. with $209 billion in assets as of December 31, 2022. It was shocking to see such a large bank collapse in a single day with the FDIC taking control of the bank as of this morning. Things happen gradually and then suddenly. The stock, which was trading over $267 on Wednesday was halted earlier today.
So what happened to trigger this sudden collapse? In three words, a crisis of confidence. The bank made two announcements without thinking through the second order effects of those announcements. Daniel Kahneman’s book Thinking Fast and Slow should have been required reading for the risk and communication departments of the bank.
They indicated that they were selling substantially all of their available for sale securities portfolio for $21 billion and taking a loss of $1.8 billion in Q1 2023. Then they attempted to raise additional capital through an offering. Venture capital firms, private equity firms and their portfolio companies immediately starting withdrawing cash, leading to a crisis of confidence and the eventual collapse.
To understand the underlying reasons for how they got to this point, check out our list of curated Tweets below that do a much better job of explaining what transpired than I could ever do.
