Silicon Valley Bank Collapse(Analysis by our group)

History and Overview:

Silicon Valley Bank Financial Group (SVBFG) was founded in 1983 and was
headquartered in Santa Clara, California. Prior to its failure, SVBFG was a
financial services company, financial holding company, and bank holding
company with approximately $212 billion in total assets. SVBFG's principal
subsidiary was Silicon Valley Bank (SVB), a California state-chartered bank
with approximately $209 billion in assets that was a member of, and
supervised by, the Federal Reserve System (i.e., state member bank).While
SVBFG had both U.S. and non-U.S. subsidiaries, SVBFG primarily operated in
the U.S. and offered commercial and private banking products and services
through SVB. SVBFG derived substantially all of its revenue from U.S. clients,
and approximately 80 percent of its employees were based in the United
States.

SVBFG's Quick Development:

At year-end 1983, SVB's assets were approximately $18 million, and SVBFG
grew gradually through 2019. Between 2019 and 2021, SVBFG tripled in size.
According to SVBFG's earnings release, 2021 was an "exceptional year of
growth driven by outstanding client liquidity" during which low interest rates
were an amplifying factor. SVBFG attributed its deposit growth to clients
"obtaining liquidity through liquidity events, such as IPOs, secondary
offerings, SPAC fundraising, venture capital investments, acquisitions, and
other fundraising activities—which during 2021 and early 2022 were at
notably high levels."

While low interest rates and more-frequent client funding events affected all
financial institutions and their clients, SVBFG saw an outsized impact
because of its concentration in venture capital and start-up clients, and
SVBFG invested these deposits in long-dated securities. SVBFG's assets grew
271 percent from year-end 2018 to year-end 2021, compared to 29 percent
for the banking industry. Asset growth slowed dramatically in 2022 as tech-
sector activity slowed in a rising-interest-rate environment.

Customer Base of the BANK

The majority of the bank’s customers were VC backed technology and life
science companies, which also constituted around half of the deposits by the
end of 2022. This concentration linked SVBFG's funding growth directly to VC
deal activity. During 2021 and early 2023, VC activity boomed, causing
deposits with the bank to rise.
During the second half of 2022 the investors risk appetite to fund the tech
startups fell as there was an increase in interest rates and concerns about
the economy rose. The slower funding slowed down the inflow of cash into
the bank's client accounts and it also increased the cash outflow as
companies withdrew money to fund their operations. Aditionally most of the
customer deposits with SVBFG were uninsured (accounting to over 94
percent of total deposits).

ASSET COMPOSITION OF SVBFG

SVBFG chose to invest majority of its funds into long term, held to maturity,
govt issued mortgage-based securities. These securities carry a lower risk
when seen from the credit perspective. As of December 31, 2022, SVBFG's
total HTM securities portfolio had a weighted-average duration of 6.2 years,
and the majority of SVBFG's HTM portfolio consisted of agency MBS with a
maturity of 10 years or more

Securities purchased by the intent to be held until maturity are classified as

HTM which can be booked at amortized historical cost rather than the
fluctuating mark to market value. In general, if a bank sells part of its HTM
portfolio, the whole portfolio would have to be classified as an AFS and
marked on the market. Given this accounting constraint and the large growth
in its HTM portfolio, SVBFG was limited to its ability to adapt its portfolio as
the interest rate environment changed. In 2022, as interest rates began to
rise, SVBFG saw a rapid increase in the unrealized losses of both its HTM and
its available for sale (AFS) portfolios.
Comparing SVB with its peers

The table given below shows that the share of securities on the portfolio of
SVB was almost double that of large banking organizations(LBOs).
Interestingly the percentage of unsecured deposits was also double that of
LBOs. At the same time, SVBFG's common equity tier 1 capital ratio (12
percent) was 200 basis points higher than the LBO average (10 percent).

SVB’s economic value of equity?

The Economic Value of Equity (EVE) measurement published in SVB's 2021

annual report indicated that the bank had a value-at-risk of $5.7bn, which
represented 34% of its capital base of $16.6bn in the event of a 200-basis
point rate shock. It is unclear how the numbers were computed and whether
any behavioral maturity was assigned to non-interest-bearing deposits. The
bank entered into swaps to reduce rate risk in March 2021, indicating an
awareness of the risk to its EVE and its size. However, SVB did not publish its
EVE sensitivities in its 2022 annual report and accounts.

The Collapse-Series of events

As per the SVBFG document sheet cash outflow of the bank increased in
2023 as the clients started to withdraw money for their operations. Concerns
grew after a Financial Times article pointed out SVBFG's substantial
securities portfolio. On March 8, SVBFG announced a restructuring of its
balance sheet, which included the sale of $21 billion in available-for-sale
securities, resulting in a $1.8 billion after-tax loss, and a planned equity
offering of $2.25 billion. The company also informed investors to anticipate
lower growth and income for the fiscal year 2023 due to a continued
slowdown in the tech sector. Additionally, SVBFG mentioned that credit
rating agencies Moody's and S&P were contemplating negative rating
actions. In a message to investors, management expressed concerns about
"continued slow public markets, further declines in venture capital
investment, and ongoing high cash burn," which would impact earnings in
2023. Furthermore, on the same day, Silvergate Capital Corporation
announced plans to shut down operations and liquidate Silvergate Bank,
which further dampened depositor confidence.

Uninsured depositors interpreted SVBFG's announcements on March 8 as a

sign of financial trouble, leading to a rush of withdrawals starting on March 9,
when SVB saw over $40 billion in deposit outflows. This bank run was
exacerbated by social media and the coordinated actions of SVB's network of
venture capital investors and tech firms, who withdrew their funds at an
unprecedented speed. On the night of March 9 and into the morning of
March 10, SVB informed regulators that it anticipated an additional outflow
of over $100 billion that day. However, SVB lacked sufficient cash or
collateral to handle such rapid withdrawals. Consequently, the California
Department of Financial Protection and Innovation (CDFPI) closed SVB on the
morning of March 10 and appointed the FDIC as receiver.

The swift collapse of SVBFG can be attributed to its reliance on uninsured

deposits from the volatile tech and venture capital sectors, as well as the
board and management's failure to effectively manage liquidity and interest-
rate risks. SVBFG benefited from record-high deposit inflows during rapid
growth in the VC and tech sectors, partly fueled by exceptionally low interest
rates. The company invested these deposits in long-term securities without
adequately managing the associated interest-rate risks, including the
removal of hedges as rates began to rise. Simultaneously, SVBFG did not
effectively manage the risks related to its liabilities, which turned out to be
more unstable than expected. As tech and VC-backed firms faced increasing
cash constraints, deposit withdrawals accelerated rapidly, driven by social
networks and media, creating a swift run on the bank.

Risk Preparedness Analysis of SVBFG

The three critical weaknesses of SVBFG were: governance and risk management;
liquidity risk management; and interest rate risk and investment portfolio
management.

A consistent theme across each area is that SVBFG’s practices did not keep pace
with its rapid growth in size and risk. The board of directors’ and risk management’s
experience and capabilities were lacking for a firm that grew to over $200 billion in
assets. With respect to both liquidity and interest rate risk, the management team
was focused on short-term measures of risk and managing to profitability rather
than understanding the longer-term risk exposure.

Management was slow to address weaknesses in risk management and the

riskiness of its balance sheet positions. Insufficiencies in the contingency funding
plan, such as lacking sufficient capacity to monetize the liquidity buffer, were
identified in November 2021 and remained only partially resolved when SVBFG
failed

Governance & Risk Management

SVBFG’s growth far outpaced the abilities of its board of directors and senior
management. They failed to establish a risk-management and control infrastructure
suitable for the size and complexity of SVBFG when it was a $50 billion firm, let
alone when it grew to be a $200 billion firm. The LFBO supervisory team recognized
that governance and risk management were not sufficient for a firm of the size and
risk of SVBFG in late 2021, conducted additional examination work in early 2022,
and downgraded the Governance and Controls rating in August 2022.

Supervisors’ failure in addressing the issues

 Supervisors gave the board of directors and management a rating of

“Satisfactory 2” for 3 years from 2018 to 2020, despite clear signs of
governance and risk management problems. The risk management
capabilities did not match the huge growth of assets of the bank when it grew
to be a $200 billion firm.
 The CAMELS rating letter dated March 6, 2019 stated that more efforts are
required to align risk management practices and also addressed weaknesses
in liquidity risk and interest rate risk management but it did not reflect in the
rating which was still Satisfactory-2.
 Supervisors issued the final RBO-based supervisory ratings letter that
provided the ratings for the 2020 supervisory cycle on May 3, 2021. The
Management section of the letter highlights several concerns that should
have brought the rating down to less than satisfactory - 3. Instead, the
supervisors kept it at Satisfactory-2.

LFBO Supervision of Governance and Risk Management

The Liquidity Target examination in late 2021 provided some insights that SVBFG’s
risk-management practices had not kept pace with its growth.
  Observations included that the board had failed to establish appropriate risk
management, internal governance structures were not enough given SVBFG’s
growth, the board lacked large bank experience, and that internal audit
coverage was inadequate.
 The CRO was found to not be having necessary experience for a large
financial institution. The CRO left the office in April 2022.
 The Governance and Risk Management examination supported the
downgrade to Deficient-1 and CAMELS ratings to “Less than Satisfactory - 3”.
 The supervisory team, Reserve Bank leadership, Board staff, and the national
LFBOMG agreed that SVBFG’s safety and soundness did not appear
threatened at the time of the rating.
 In early 2023, when SVBFG’s liquidity and interest rate risk management
were deteriorating, a Governance and Control rating of “Deficient-2” should
have been considered.

Liquidity Supervision

 An acute liquidity risk event on March 10, 2023 led to the depositors losing
faith in the ability of SVB.
 SVBFG relied on a concentrated and largely uninsured deposit base to fund
the bank, and when depositor faith was lost, SVB was not able to meet
depositor withdrawal requests
  Supervisors underestimated the liquidity risks which ultimately led to its
downfall.

Supervision of Liquidity Risk Positions

 SVBFG’s balance sheet was growing and overwhelmingly skewed toward

large, uninsured deposits in non-maturity accounts from VC-backed and
private equity clients.
 On the regulatory reporting, the SVBFG’s liquidity risks seemed to be
mitigated by the growing deposit base and a large proportion of assets
invested in low-credit risk securities.

Supervision of Liquidity Risk Management

 SVB had a ‘Strong-1” rating which meant relatively low risk. This led to
the examination of liquidity risk management practices during the
CAMELS and BHC exams to not be that extensive. This led to missed
oportunities in finding any issues in the liquidity risk framework.

Supervisory Work in the LFBO program

 The examination cited liquidity issues across the areas reviewed.

 The liquidity rating was reduced to “Conditionally Meets Expectations”
and CAMELS liquidity rating was reduced to “Satisfactory-2” after the
examination.
 Based on the letter, a negative rating(Deficient-1) for liquidity would
have been favourable but supervisors continued to assess the inherent
liquidity as favourable.

Management recognizes liquidity risk

 Year-to-date deposit trends and potential risks heading into 2023 were
first substantively reported by bank management to the SVBFG board
of directors in 2022. The bank management had suggested that more
significant measures had to be taken to deal with the continuous
deposits pressure.

Management responses in 2022

 Most significantly, management began actions to address liquidity

pressures by increasing Federal Home Loan Bank (FHLB) advances,
initiating efforts to increase repurchase agreement capacity and
 incorporating new stress assumptions that lowered liquidity
requirements, among other actions.
 Most substantively, management targeted changes to ILST
assumptions in October 2022 that had the effect of reducing the size of
the modeled liquidity shortfall. They updated methodologies for
unfunded lending commitments and intraday liquidity that reduced
requirements in the combined scenario at the 30-day horizon by
approximately $8 billion and $5 billion, respectively

Changing model assumptions and not improving the liquidity position was
not the best way to tackle the problem.

The liquidity stress on March 9, 2023 was far high as it overcame

the weak the liquidity stress preparedness of the bank. SVBFG was
not able to monetize (immediately raise funds against) its
investment securities. SVBFG had not arranged for enough access
to repo funding and had not signed up for the Federal Reserve’s
Standing Repurchase Agreement facility. SVBFG had limited
collateral pledged to the Federal Reserve’s discount window, had
not conducted test transactions, and was not able to move
securities collateral quickly from its custody bank or the FHLB to the
discount window.

Interest Rate Risk and Investment Portfolio Supervision

 SVBFG had a short term view of IRR through NII rather than the EVE metric.
 Management did not consider the risks such as the uniqueness of the
customer base and how it can be impacted by rate increases.
 Reports for IRR were not rapid or severe enough that led to poor decisions at
SVBFG
 Federal Reserve supervisors did not conduct an indepth review of the interest
rate risk. Instead they were reviewed by the CAMELS exam.
 IRR practices showed several levels of concerns that were not raised as
findings. Breaches to the EVE metric were evident in the 2020, 2021 & 2022
exams.
 Issues were identified regarding the lack of sensitivity testing, back-testing,
gaps with policies, ineffective control functions, and lack of oversight from
senior management and the board of directors.
Analysis of BASEL-III Disclosures by the Bank

Capital and Liquidity Ratios

SVB Financial Group (Consolidated):

Common Equity Tier 1 (CET1) Ratio:

Actual Basel III Minimum

12.05% 4.5%

Tier 1 Capital Ratio:

Actual Basel III Minimum

15.40% 6%

Total Capital Ratio:

Actual Basel III Minimum

16.18% 8%

Tier 1 Leverage Ratio:

Actual Basel III Minimum

8.11% 3.0%

Silicon Valley Bank (Subsidiary):

CET1 Ratio:

Actual Basel III Minimum

15.26% 4.5%

Tier 1 Capital Ratio:

Actual Basel III Minimum
15.26% 6%
Total Capital Ratio:

Actual Basel III Minimum

16.05% 8%

Tier 1 Leverage Ratio:

Actual Basel III Minimum

7.96% 3%

Capital Conservation Buffer (CCB):

SVB Financial Group:

Actual Basel III Minimum

17.55% 2.5%

Silicon Valley Bank:

Actual Basel III Minimum

8.05% 2.5%

2. Risk-Weighted Assets (RWA)

SVB Financial Group:

Actual: $113.6 billion

Regulatory Requirement: No specific figure required; based on exposure and
risk-weighting methodology.

Silicon Valley Bank:

Actual: $111.4 billion

3. Credit Risk Exposures

Total Loans:
Actual: $74.3 billion
Basel III Recommendation: No direct limit but requires adequate provisioning
and risk-weighting for loans.

Unfunded Credit Commitments:

Actual: $58.9 billion

Debt Securities (Held-to-Maturity):

Actual: $117.4 billion

Basel III Risk-Weight Requirement: Based on credit quality and duration of
securities.

Non-Performing Loans:

Actual: $132 million

U.S.: $123 million
Other Regions: $9 million

Allowance for Credit Losses:

Adequacy required under Basel III, actual figures not detailed in the report
but monitored closely.

4. Counterparty Credit Risk

Derivative Exposures:

Actual: $466 million (current credit exposure)

Collateral Received:
Cash: $791 million
U.S. Treasuries: $602 million

Repo-Style Transactions:

Actual: $1.31 billion

Basel III Guidelines for Counterparty Credit Risk:

Requires risk-weighting based on counterparty credit quality, netting

arrangements, and collateral.

5. Liquidity Risk and Interest Rate Risk

Debt Securities with Duration > 5 Years:

Actual: $100.7 billion

Basel III Requirement: Requires stress testing and appropriate hedging of
interest rate risks.

SVB faced significant mark-to-market losses on long-term securities due to

rising interest rates, which Basel III advises mitigating through effective
Asset-Liability Management (ALM).

6. Equity Investments

Total Equity Investments: $3.82 billion

Non-Publicly Traded: $3.75 billion
Publicly Traded: $71 million

Basel III Risk-Weights for Equity Investments:

Public Equity Investments: 100% risk-weight.

Certain Non-Significant Investments: 100% risk-weight.
Higher weights (up to 400%) for other riskier categories.

Key Observations on Basel III Compliance and Recommendations

Strong Capital Ratios: SVB exceeded the Basel III minimums for CET1, Tier 1,
and Total Capital Ratios.
Liquidity Stress: A heavy reliance on long-duration securities without
adequate hedging exposed SVB to interest rate risks, violating Basel's stress-
testing recommendations.
Client Concentration Risks: Basel III emphasizes diversification, which SVB
lacked due to its narrow focus on technology and venture capital sectors.
Credit Risk Management: Basel III suggests proactive credit risk mitigation;
however, SVB's exposure to unfunded credit commitments and non-
performing loans indicates room for improvement.

CONCLUSION AND KEY-TAKEAWAYS:

Report by ChatGPT

Analysis Report: The Collapse of Silicon Valley Bank (SVB)

Introduction

Silicon Valley Bank (SVB), one of the largest banks catering to the tech
industry, collapsed in March 2023, triggering concerns across financial
markets. Its sudden failure was the largest bank collapse since the 2008
financial crisis. The event highlighted significant risk management lapses,
especially in interest rate risk, asset-liability management, and liquidity
management. This report provides a detailed analysis of the collapse,
examining the root causes, contributing factors, and lessons learned.

Key Factors Leading to the Collapse

1. Business Model and Concentration Risk

 SVB primarily served startups, tech firms, and venture capital (VC)
investors, resulting in a highly concentrated depositor base.
 During the tech boom in 2020-2021, deposits surged as VC funding
reached record levels. SVB's assets ballooned from $71 billion in 2019
to over $200 billion in 2022.
 However, this concentration exposed the bank to a downturn in the
tech sector. By 2022, as interest rates rose and VC funding declined,
the deposit base shrank.

2. Interest Rate Risk Mismanagement

 SVB invested a significant portion of deposits into long-term fixed-rate

securities, such as U.S. Treasury bonds and mortgage-backed
securities (MBS), to achieve higher yields.
 Rising interest rates in 2022-2023, driven by aggressive Federal
Reserve tightening, led to a sharp decline in the market value of these
securities. Unrealized losses on its bond portfolio exceeded $15 billion
by early 2023.
 SVB failed to hedge adequately against this interest rate risk, leaving
its balance sheet vulnerable.

3. Liquidity Crisis

 To meet customer withdrawals, SVB was forced to sell its bond

holdings at a significant loss.
 On March 8, 2023, SVB announced a $1.8 billion loss on asset sales
and attempted a $2.25 billion equity raise to shore up its capital.
 This announcement spooked customers, sparking a bank run. Within
48 hours, depositors attempted to withdraw $42 billion, far exceeding
the bank’s liquid reserves.
4. Regulatory and Oversight Failures

 Despite its size, SVB was not subject to the stricter regulatory
requirements that apply to systemically important banks.
 The 2018 rollback of Dodd-Frank provisions for banks with assets
under $250 billion reduced the frequency and rigor of stress testing for
banks like SVB.
 Regulators failed to identify and address the growing interest rate and
liquidity risks in SVB’s portfolio.

Impact of the Collapse

1. Immediate Market Reactions

 SVB's collapse triggered panic among tech startups and venture

capitalists, many of whom relied on SVB for their banking needs.
 The U.S. Treasury, Federal Reserve, and FDIC intervened to protect
depositors, announcing a backstop that guaranteed all deposits,
insured and uninsured, to prevent contagion.

2. Contagion Risk

 The failure of SVB led to increased scrutiny of other regional banks

with similar profiles, such as Signature Bank and First Republic Bank.
 Concerns over systemic risk and the stability of the banking sector
temporarily shook global financial markets.

3. Policy and Regulatory Reforms

 The collapse reignited debates on the effectiveness of current

regulatory frameworks.
 It highlighted the need for better monitoring of interest rate risks,
stress testing, and enhanced oversight of mid-sized banks.
Lessons Learned

1. Importance of Diversified Depositor Base

Concentration risk amplified SVB’s vulnerability during the tech sector
downturn.
2. Robust Asset-Liability Management (ALM)
Banks must carefully balance asset durations and interest rate risks.
Hedging against rising interest rates is critical.
3. Enhanced Stress Testing
Regulatory frameworks should include regular stress tests, even for
mid-sized banks, to assess liquidity and interest rate sensitivity under
adverse scenarios.
4. Communication During Crisis
SVB’s poorly managed disclosure of its financial difficulties worsened
depositor panic. Transparent, proactive communication is vital during
crises.

Recommendations for Risk Management

1. Interest Rate Hedging

Implement robust hedging strategies to mitigate exposure to interest
rate fluctuations.
2. Dynamic Liquidity Management
Maintain sufficient liquid assets to cover unexpected withdrawals.
Diversify funding sources beyond concentrated depositor bases.
3. Regulatory Reforms
Revisit thresholds for enhanced regulatory scrutiny. Ensure mid-sized
banks are subject to proportionate oversight to prevent systemic risks.
4. Technology for Early Warning Systems
Utilize AI and predictive analytics to monitor emerging risks in real
time.

Conclusion

The collapse of Silicon Valley Bank underscores the importance of sound risk
management practices and effective regulatory oversight. While it was a
wake-up call for the banking sector, it also provided valuable lessons on
managing concentration risks, interest rate exposures, and depositor
confidence. Moving forward, a balanced approach that combines regulatory
vigilance and proactive risk management will be essential to prevent similar
failures.