The collapse of Silicon Valley Bank: how and why the main bank of techno-startups of Silicon Valley burst
On Friday, there was a loud "clap" in the financial markets: the 16th largest US bank suddenly burst – and the bankruptcy itself became the second largest in history among American commercial banks. In this article, we take a look at what happened and how it might affect us all.

How it all began: a bank for geeky Zuckerbrin
40 years ago (in 1983), a bank appeared in California, which relied on start-ups - it decided to serve mainly tadpole guys who created new promising businesses and attracted a lot of money from venture investors.
Given that the case took place exactly in Silicon Valley, and the bank was called Silicon Valley Bank (SVB) – this business model was extremely successful. After all, Silicon Valley became a real cradle for fast-growing technology companies that for the next few decades raked money literally with a shovel (and some of them, of course, put in the bank).

In 2020-2021, the technology industry in the United States experienced another boom: under the slogan of fighting Covid, unprecedentedly huge amounts of money were thrown into the financial system, and a significant part of it went to finance "fashionable" fast-growing tech companies. The Nasdaq-100 index has almost doubled in these two years, and startups raced initial stock issues (IPOs) and attracted money directly from venture investors on an industrial scale.
It is not surprising that the business of SVB Bank, which serves all these technostartups, also grew by leaps and bounds. The volume of deposits of its customers during this period more than tripled (as well as the bank's stock quotes) and reached approximately $ 2022 billion by the beginning of 200 – so that Silicon Valley Bank became as much as the 16th largest bank in the United States (and the second in California).

Any bank, of course, is happy when it is given a lot of money. But with big headstocks comes a great responsibility: you need to decide where to invest them - so that they earn a pleasant profit in the pocket of the owners of this bank. And that's where it gets interesting!
What to do with the money, Lebovsky?
The classic business model of any bank is to collect more deposits at a lower rate, and distribute this money to reliable companies in the form of loans at a larger rate. In the case of Silicon Valley Bank, this turned out to be a bit problematic: most of your Silicon Valley startups don't look much like "reliable businesses" (where the guys mostly have beautiful pictures with the promise of rapid revenue growth in the future – and not stable cash flows and strong collateral). And they did not have much money: as I wrote above, in 2020-2021, investors did not line up to pour money literally in bags to such startups.
Therefore, SVB decided that it would be logical to invest money in the stock market. No, of course, they didn't go buy Tesla shares with leverage – that would have been too much. But to buy reliable bonds from the US government (US Treasuries), or debt mortgage securities with suitable collateral in the form of real estate – why not?

The US Fed then drowned the interest rate almost to zero (in the name of saving the economy from covid horrors), so placing money in reliable US Treasuries on the horizon of a year or two brought about zero returns.
Here are the bankers from Silicon Valley Bank and thought that investing at 0% - you will not earn much for bread and butter (and they still have to pay all current expenses: salaries to employees, office rent, and so on). The solution was simple – the bankers simply took the lion's share of the available funds into longer securities with a maturity of 5-10 years (for the most part - mortgage), which at that time had a yield slightly above 1.5% per annum. Despite the fact that they paid almost no profitability to their clients on attracted deposits - a good margin, right?
How Rising Rates Killed Bonds
Any financier knows that buying long bonds, you take on the risk of rising interest rates. If you bought a long bond during a period of low rates and then the rates skyrocketed, then, to put it in Tommy's terms from the movie Snatch, "You are PROPER FUCKED."

Why? The invisible hand of the market, ept! Follow the logic: suppose a company issued a bond with a face value of $ 100, a coupon of 1% per annum (this was the market level at that time), and a maturity of 50 years – and you bought it. A year later, the market level of rates increased, and now it is customary to lend to such companies at 2% per annum.

Will you be able to sell your $100 bond to someone? Of course not – you will not find such fools (why would someone invest at 1%, when the market already gives 2% with similar reliability?). But for a conditional $ 50, such a bond will be bought from you without any problems: after all, then a coupon of $ 1 per year will just give a yield of 2% on the "current market value" of the paper of $ 50 (the exact figures will not be quite the same, but these are details - you understood the logic).
Actually, this is exactly what happened in 2022: the head of the US Federal Reserve System was a bit sub-figurative from the explosive growth of inflation, and at a record pace raised the interest rate from about zero to almost 5% (at the moment).

It is clear that in this scenario, the bond portfolio of Silicon Valley Bank was "sad": by the 4th quarter of 2022, it showed a drawdown of 9 to 17%, which already seemed to exceed the size of the bank's equity capital (that is, the difference between the available assets and liabilities to depositors).
Bank Raid: Why It's Sometimes Important to Be First in Line Rather than Last
Interestingly, in itself, this loss was not yet fatal for the bank - after all, tricky accounting standards allow it not to be partially recognized immediately (more details here). And there is even logic in this: due to the growth of rates, bonds seem to sink not forever, but temporarily. If you hold them until maturity, then they will eventually recover and everything will be OK.
But this logic only works if the bank has "the ability to wait." And then it's time to remember that most of the deposits in Silicon Valley Bank are the so-called "demand deposits", which can be withdrawn at any time. Oops...

The systematic outflow of such deposits from the bank began in mid-2022. And there is no malicious intent on the part of Silicon Valley Bank customers in this: the tech industry began to decline, it was no longer possible to attract new investors' money - so many companies began to actively "eat" the accumulated reserves earlier.
But for SVB, it felt like a gradual activation of a time bomb: after all, deposits on request had to be reimbursed from the most liquid assets – which means that more and more long-term bonds remained on the balance sheet. And the faster the outflow of deposits became, the more understandable it became that it would not be possible to simply "sit to maturity" in these bonds - sooner or later they would have to be sold at a loss in order to get funds to return money to customers right now.
Actually, this is exactly what happened, and in 2023 the bank had to start selling these ill-fated long bonds at a loss – and then it suddenly became very clear to everyone that the "king is naked", and in fact there will not be enough money for everyone. Venture startups from Silicon Valley began to vie to call each other and advise to urgently withdraw all the money from Silicon Valley Bank. But it was too late...

It turns out that here the concentration of SVB on one sector played a cruel joke with the bank: if they had a lot of small retail customers, maybe it would have carried away. But since IT startups in the Valley communicate very closely with each other, there was a full-fledged raid on the bank, when everyone is trying to pull out their money early (because the last in this queue may not get anything).
Well, the logical result is that on March 10, banking regulators in the United States began, de facto, the bankruptcy procedure of SVB.
Bankruptcy of the largest bank in California: a pleasant little
All operations with the bank were instantly suspended – for a huge number of startups from the Valley, this was a real shock (many of them used Silicon Valley Bank as the only place to store funds raised from investors).

The American deposit insurance system FDIC next week already promises to start payments to affected depositors - while the insured amount is $ 250 thousand per deposit. But this is only a part of the funds, in the region of 15% of the total amount of deposits. What will happen to the rest of the depositors is still unclear.
The worst case is if the case ends in a full-fledged bankruptcy, with the gradual sale of all assets and the division of the resulting pile of money between everyone to whom the bank owes. This process will most likely not be fast - but, nevertheless, depositors should eventually receive the principal amount of the invested back (I think at least 80% - but it will be possible to say for sure only on the basis of detailed current financial statements).
A good scenario assumes that the whole bank will buy someone big and close the resulting hole in the balance sheet with its own funds, receiving in return a working business (which a year ago was evaluated by the market quite well).
It is clear that US regulators will go out of their way for the "good" scenario – so that all the people around them get what is due to them, calm down, and the negative effects on the prevailing mood among financiers are limited. But even in the worst-case scenario, it still looks like a bank bankruptcy of even this size is unlikely to cause a domino-like collapse of the entire financial system (and this, of course, in such situations everyone fears the most).
The most painful, it seems, as usual hit the cryptans
Silicon Valley Bank kept money not only from classic IT entrepreneurs, but also from cryptans. In particular, the company Circle, the head of one of the largest stablecoins USDC, also held there part of the reserves for this token. So in the wake of such news, the USDC on the night from Friday to Saturday cheerfully depoped (untied from $ 1) and is currently trading in different places for about 90% of the nominal value.

Why at the moment everyone is in a panic getting rid of USDC and greatly dropped the price is understandable; but let's try to figure out what situation we find ourselves in in terms of the fundamental indicators of the security of this stablecoin. (Disclaimer: The author of this article has money in USDC, so I'm a bit biased here – keep that in mind!)
According to the most recent data from the Circle website, as of March 9, total reserves amounted to an impressive $ 43.5 billion, of which 75% ($ 32.4 billion) accounted for the short US national debt - about these funds, tfu-tfu, there is no need to worry. But $ 11 billion was in bank accounts, and according to Circle on Twitter, $ 3.3 billion was persuaded to end up in Silicon Valley Bank.

If we count "head-on", then the funds blocked in SVB accounts make up 7.5% of the reserves – which is a lot. But at the same time, as we discussed above, it is hardly necessary to consider this money "completely missing". If we assume that at least 80% of the bank's liabilities are adequately secured by assets, then the real "hole" in the balance sheet of Circle can be only ~1.5%, which already looks not so threatening. Taking into account the fact that now reliable short bonds of US Treasuries bring 5% per annum - you can recoup this amount purely from interest income in four months.
True, if everyone massively rushes to exchange their USDCs for real cash directly in Circle - then this "small hole" can begin to grow ... And the last who will come for such an exchange will get a hole from a bagel - in fact, because of the fear of such an outcome, these very raids on banks occur (and Circle in this case acts as a kind of crypto-bank).
Is that likely? I do not undertake to give advice and predictions here - but I can share my personal opinion: it seems to me that with the beginning of the next working week (when interbank transfers and so on will work again), arbitrageurs should quickly return the USDC peg to $ 1 (albeit not ideally, but the deviation should be reduced from 10% to at least 1-2%). At the same time, we should expect a significant reduction in the capitalization of USDC due to the work of arbitrageurs (who will buy tokens for $ 0.9 and exchange them in Circle for a real crunchy dollar).
So one of the main questions here is whether Circle will have the patience and infrastructural capabilities to sit out the first wave of outflow of funds, and how much they will be able to draw a clear and transparent picture for cryptans regarding "what is wrong with reserves now and what is the plan for the future."

A worse scenario for USDC crypto holders here might look something like this: Circle states "sorry, there's a hole in the balance sheet, so we're suspending the exchange of USDC for dollars – until we figure out how to fairly divide the reserve balances between everyone." Based on our calculations above, this in itself will not mean that all the money in USDC is lost (Circle has plenty of real assets), but all arbitrage mechanisms at the moment will break down - and USDC quotes will go even much lower than $ 0.9.
Anyway, we'll see. It is not an investment recommendation, but personally I still bet on a moderately positive scenario for the USDC - and I am preparing on Monday-Tuesday, if the quotes again approach $ 1, to slowly diversify my "crypto-cushion" away from the USDC. But of course, I could be wrong.
P.S. I foresee a lot of schadenfreude in the comments on the topic that "Tether was branded for unreliability, and the USDC eventually turned up!" Well, here we must also take into account that we now know about the problems of the USDC precisely because of the greater transparency of this token. If Tether were in the same situation, we probably wouldn't even know about it now (and, accordingly, it is not a fact that the situation inside the reserves is much better there now).