March 15, 2023

Statement on Silicon Valley Bank

On Friday, financial regulators shut down Silicon Valley Bank (SVB), making for the largest banking collapse since the failure of Washington Mutual in 2008.

How exactly did this happen?

The typical business model for banks is that they take deposits and then loan that money to individuals and businesses. Through this process, they also invest some of those depository assets into publicly traded bonds. There were two important differences between SVB and the average bank:

  • SVB’s customer base largely consisted of private equity and start-up firms. That concentration made them unusually exposed to risk. They were concentrated both in terms of their customer base—largely privately held early-stage technology companies—and the average size of their deposits. The average deposit size of SVB’s roughly 37,000 clients, which made up approximately 74% of the bank’s assets, was greater than $4 million. Because SVB had a concentration of larger depositors, their withdrawals were larger as well.

  • SVB had a large bond portfolio invested when interest rates were low. That is not all that unusual, but here was the problem for SVB. The bank owned a large bond portfolio purchased before the steep interest rate rises of the last year or so. When interest rates rose, the value of those bonds declined, leading to losses that affected SVB’s required capital ratios.

SVB’s erosion of capital was significant enough to have to raise capital through the sale of equities, which is what SVB planned to do in the middle of last week. Once this became known, you can guess what happened next. Depositors of the bank saw that their assets were in jeopardy, and a run on the bank commenced.

The U.S. Government last night announced a forceful response to the failure of SVB, including:

  • Full protection of all insured and uninsured deposits; and

  • A new Bank Term Funding Program (BTFP) at the Federal Reserve which allows financial institutions to access liquidity at the central bank instead of crystallizing losses on their hold-to-maturity Treasury portfolios. Importantly, this program allows the banks to post their Treasuries as collateral at par—not at currently discounted market prices.

Assurances that depositors will be made whole and the removal of the mark-to-market risk that many were worried about should eventually restore order to the financial markets. The situation is evolving, but these actions should go a long way toward being a circuit breaker on the panic in the financial system.

Thank you for your ministry and know that you always have our full commitment to serve you and your ministry.

Gary W. Kidwell
President Christian Church Foundation