THE dramatic fall of Silicon Valley Bank (SVB) has been dubbed a “Twitter-led bank run”, as venture capital investors (VCs) fought openly on the platform about whether startups should pull out their money or stay put. The rapid collapse within 44 hours was likely accelerated by social media, and many are blaming VCs for stirring panic.

But beyond the new-age medium, the reasons behind SVB’s failure are age-old. As with past bank runs, this appears to be a case of inadequate risk management and poor communication.

Last Thursday (Mar 9), SVB clients initiated withdrawals of about US$42 billion, leaving the bank with a negative cash balance of US$958 million. The trouble seems to have started with rising interest rates, which made VCs more risk-averse and startups tighter on funds. To meet clients’ cash withdrawal requests, SVB sold its US$21 billion bond portfolio.

However, the bank had to recognise a US$1.8 billion loss on the sale, hit by rising interest rates. It then announced a US$2.25 billion stock sale to fill the loss, which may have been the last straw for spooked depositors.

Prominent VCs urged their portfolio companies to get their funds out while they still could. Word spread online, sparking a mad rush for withdrawals. Meanwhile, the share price of SVB’s parent tanked 60 per cent. US regulators quickly pulled the plug on SVB on Friday.

As the dust settles, several well-worn lessons emerge. One, given the risky nature of its business, SVB should have been more prudent in planning ahead. The 40-year-old bank’s client base is concentrated in VCs and loss-making startups, whose ability to raise capital changes rapidly with interest rates.

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Given that the sector boomed in the age of ultra-low interest rates, SVB should have foreseen that rising rates would be a big dampener on deposits, especially as it became apparent in early 2022 that tech valuations could implode.

SVB also had another layer of risk to mitigate. About 96 per cent of deposits with SVB were not covered by the Federal Deposit Insurance Corporation (FDIC) as at end-2022. The FDIC insures deposits of up to US$250,000, but many of SVB’s clients had parked sums well over that threshold. This inordinate exposure to uninsured funds put the lender in a precarious position.

Things began to go south as the bank’s large bet on long-dated treasuries and mortgage securities soured on rising rates. SVB had racked up over US$15 billion in mark-to-market losses as of end-2022 for securities held to maturity, close to its equity base of US$16.2 billion, but this was not too obvious due to accounting rules, Bloomberg reported.

Beyond risk controls, SVB could perhaps have also quelled some of the panic with better communication. The bank’s announcement of the bond sale loss, coupled with a massive fundraising attempt, was just too much for the market to handle. Assurances that it was “business as usual” backfired rapidly, as it sounded all too much like the prelude to the Lehman Brothers collapse of 2008.

Poor timing contributed to the perfect storm. Questions have emerged on why SVB waited until the US$1.8 billion loss to go on a fundraising effort, when it could have strengthened its balance sheet earlier. Its announcement also came on the heels of the collapse of Silvergate Bank, a key lender in the crypto space. Investors were already unnerved, and SVB may have underestimated just how rapidly panic would spread through Twitter, the town square of many VCs and tech chief executives.

The fallout appears to be more contained for now, as US regulators said on Monday that all SVB deposits are safe. But the lesson is worth remembering: robust risk management isn’t just for the too-big-to-fail consumer banks, but for every institution entrusted with deposits.