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Silicon Valley Bank (SVB) was thriving. Credit losses are fairly low. Its deposits TRIPLED from 2019 to ‘21. How’s that a problem? It sounds great, right? 1. When banks accept deposits from clients, they OWE the client that money. So deposits are liabilities to the bank. Liabilities cost money……”cost” both to serve those clients (branches, tellers etc ) and any interest the bank pays you on your checking account (deposit). 2. To pay for the cost of those liabs, banks turn them into assets: lending deposits as small business loans, mortgages, etc. If a bank can’t lend deposits responsibly, it often uses excess to BUY loans or “securities,” like US Treasuries & Mortgage Backed Securities (MBS) 3. As mentioned above, from 2019-2021, the deposits tripled! SVB needed to take those funds & acquire “assets” to pay its costs. 4. Much of the $ was from VC-backed companies that needed a place to deposit the $ they raised. Those are big deposits. 5. Deposits were pouring in too fast to lend responsibly. SVB recognized that. Rather than make dumb loans, SVB bought assets guaranteed by the US government - Treasuries and MBS. BUT, it bought long duration. Often 10+ year bonds. Mistake! 6. When rates rise, fixed income prices fall. A general rule of thumb is for every one year of “duration,” each 1% interest rate move impacts the price of the bond by: 1% x Duration A 1% move on a 9 yr duration bond is ~9% +/- on the bond price. But banks are levered… 7. Remember: banks generally acquire assets by using deposits (liabilities) as the capital source. And banks like SVB are levered 10:1 or more: owing $10+ for every $1 of shareholder equity. If you’re levered 10x, a 10% loss on assets is a 100% wipeout. 8. So SVB bought high quality assets, but it bought tons of them with LONG duration at LOW interest rates. When the Fed raised rates, those assets declined in value… …1% x Duration. Those losses, multiplied through the leverage at SVB, caused a big problem! 9. SVB now has a mark-to-market hole in its balance sheet. It’s “just” mark-to-market: as long as its liabilities are sticky (ie, depositors leave their money SVB), it will ultimately be fine. But that’s a big “if.” 10. Technically, if all the depositors ask for their $ back at once, SVB needs to sell those bonds at the mark-to-market value, crystallizing what could have been a temporary loss. And if those losses are big enough, it may not have enough money to pay out all depositors. 11. But that situation rarely happens. However, once it starts, game theory kicks in: NOBODY wants to be the last depositor at a bank. 12. Which brings us to today. SVB has large depositors. Large depositors aren’t fully insured by the FDIC - they have an incentive to find HIGHLY sound banks. Once a whiff of issue pops up, large depositors run…“bank run.” 13. As a bank’s deposits go in reverse, it has to sell assets. The FHLB steps in to help turn its less liquid assets into more liquid.

📌Silicon Valley Bank Collapse Explained in Bro code. 🥹 Even a 15 year old can understand. Characters - SVB, Fed, Bro (Startup) ✅ Between 1994 till 2021 Bro: Who are you bro? SVB: I am your friend. Bro: Will you lend me money? I am a tech startup. SVB: Offcourse, Kitna Chahiye? Bro: Tu bhai hain mera🥹 When everyone rejected me tune support Kiya. SVB: Thenks! ✅ In 2021 Bro: I have some money leftover from fundings, can I deposit? SVB: Unasked Bro anytime 🙈 Now, Bro Started depositing money at SVB at 0%. So much that deposits at SVB are way above than loans granted. SVB now forced to buy zero rated long term security (MBS - Jaane de naa, Tu bhavnao ko samajh) ✅ In 2022 Fed: I increased the rates to 1%. Ting ting tiding! SVB: Whatever! 🙄 Bro: Yeah Whatever! I am with u SVB😘 . . . . Fed: I increase the rates again to 1.5%. Dhan Ta Dha! SVB: Whatever! 🙄🙄 Bro: Yeah Whatever. 😐 . . . . Fed: I increase the rates to 2.5%. Hehehe😂 SVB: Whatever! 🙄 Bro: 😒😒😒🤐 WhatsApp University: How dare you? Fed: Shutup bro, this is not Adani fiasco. Just F*ckoff. . . . . Fed: I increase the rates to 3%. 😎 SVB: Whatever! 🙄 Bro: 🤒🤕🤧 Bro, gimme my deposits back! I will invest in zero risk fed bonds at 3%. SVB: I trusted you bro, the zero rated bonds I have purchased from your deposits are trading less than my cost now. Bro: Whatever! 🙄 Gimme my money back! SVB: Tu mera bhai tha naa bro? Bro: Baap bada na bhaiyaa sabse bada Rupaiya bro 🥱 SVB: OK bro! Deta main teko. FED: 🤣🤣🤣 SVB: I sold my investments at $1.8Bn loss just to pay you back bro!  (Stock plummet after this) Bro: Whatever🙄 Other Bros: Hey SVB, We want out money back too. SVB: 🥵🤢🤢💔 waaat! Other Bros: Yes😐 our new bhai is Fed now. This saga continued entire day yesterday, the demand to return deposits were so so crazy that California authorities shut the bank. The SVB collapsed in 4 hours! It is in control of FDIC now, who will sell assets and deposits to repay lenders and customers. The #svb didn't collapse due to bad lending practices but bad Asset Liability Management. Its because of "Whatever! 🙄". They failed to act when they should have. Its not right to compare it with Lehman or Enron. Its more on the likes of LTCM collapse. Its classic case of bank run. Had they given some time by the depositors, SVB could have survived. Follow me (Parth) for more such content. Subscribe to The Valuation School YT channel for premium content on Investment Banking Prep and financial modelling.

📌Silicon Valley Bank Collapse Explained in Bro code. 🥹 Even a 15 year old can understand. Characters - SVB, Fed, Bro (Startup) ✅ Between 1994 till 2021 Bro: Who are you bro? SVB: I am your friend. Bro: Will you lend me money? I am a tech startup. SVB: Offcourse, Kitna Chahiye? Bro: Tu bhai hain mera🥹 When everyone rejected me tune support Kiya. SVB: Thenks! ✅ In 2021 Bro: I have some money leftover from fundings, can I deposit? SVB: Unasked Bro anytime 🙈 Now, Bro Started depositing money at SVB at 0%. So much that deposits at SVB are way above than loans granted. SVB now forced to buy zero rated long term security (MBS - Jaane de naa, Tu bhavnao ko samajh) ✅ In 2022 Fed: I increased the rates to 1%. Ting ting tiding! SVB: Whatever! 🙄 Bro: Yeah Whatever! I am with u SVB😘 . . . . Fed: I increase the rates again to 1.5%. Dhan Ta Dha! SVB: Whatever! 🙄🙄 Bro: Yeah Whatever. 😐 . . . . Fed: I increase the rates to 2.5%. Hehehe😂 SVB: Whatever! 🙄 Bro: 😒😒😒🤐 WhatsApp University: How dare you? Fed: Shutup bro, this is not Adani fiasco. Just F*ckoff. . . . . Fed: I increase the rates to 3%. 😎 SVB: Whatever! 🙄 Bro: 🤒🤕🤧 Bro, gimme my deposits back! I will invest in zero risk fed bonds at 3%. SVB: I trusted you bro, the zero rated bonds I have purchased from your deposits are trading less than my cost now. Bro: Whatever! 🙄 Gimme my money back! SVB: Tu mera bhai tha naa bro? Bro: Baap bada na bhaiyaa sabse bada Rupaiya bro 🥱 SVB: OK bro! Deta main teko. FED: 🤣🤣🤣 SVB: I sold my investments at $1.8Bn loss just to pay you back bro! (Stock plummet after this) Bro: Whatever🙄 Other Bros: Hey SVB, We want out money back too. SVB: 🥵🤢🤢💔 waaat! Other Bros: Yes😐 our new bhai is Fed now. This saga continued entire day yesterday, the demand to return deposits were so so crazy that California authorities shut the bank. The SVB collapsed in 4 hours! It is in control of FDIC now, who will sell assets and deposits to repay lenders and customers. The #svb didn't collapse due to bad lending practices but bad Asset Liability Management. Its because of "Whatever! 🙄". They failed to act when they should have. Its not right to compare it with Lehman or Enron. Its more on the likes of LTCM collapse. Its classic case of bank run. Had they given some time by the depositors, SVB could have survived. Follow me (Parth) for more such content. Subscribe to The Valuation School YT channel for premium content on Investment Banking Prep and financial modelling. (link in comments) #finance #investmentbanking #venturecapital