An Overview of the SVB Collapse: A Comprehensive Timeline

In the wake of the COVID-19 pandemic, the global economy experienced significant upheaval. The financial sector was no exception, and many banks faced unprecedented challenges as they struggled to navigate an increasingly volatile economic landscape. One such bank was SVB, which had a surplus of liquidity in 2020-2021 and chose to invest in long-dated treasury bonds. However, a significant increase in interest rates and the bank's failure to hedge its bonds created a funding mismatch, leading to a depletion of capital and liquidity. This article will provide a comprehensive timeline of the events that ultimately led to the collapse of SVB, based on information gathered from various sources:

1) In 2020, the COVID-19 pandemic significantly impacted the global economy. The Federal Reserve implemented fiscal policies aimed at mitigating the economic fallout, injecting liquidity into the financial system. The lockdown also reduced spending by individuals and businesses, leading to an increase in deposit bases across all banking institutions

2) In 2020-2021, SVB had a surplus of liquidity, which they chose to invest in fixed assets in the form of long-dated treasury bonds. Given that interest rates were at record lows, this decision was expected to yield an additional return of approximately 0.5% compared to holding the funds as cash. SVB did not choose to hedge these bonds.

3) By 2022, there was a significant increase in interest rates. As a result, SVB found itself holding fixed treasury bonds yielding approximately 0.5%. Since SVB had funded these bonds with floating liabilities that typically changed in rate in line with the market rate, this change created a funding mismatch for SVB.

4) SVB's decision not to hedge has left them with no option to raise the rate paid to depositors. While they attempted to maintain their funding to finance the low-yielding bonds, the cost of funding in the market surged to approximately 4%. Consequently, customers started leaving SVB since they could earn a much higher yield on their deposits by investing elsewhere.

5) In an attempt to retain depositors, SVB increased the rate offered on their deposit accounts from 0.5% to 1%. However, this move had minimal impact since the market rate remained around 4%, causing SVB to continue losing customers. Additionally, the increased rate paid to depositors meant that SVB was now paying more for deposits than what they were earning from the treasury bonds, causing a slow depletion of their capital.

6) As SVB continues to lose deposits at an accelerated pace, they encounter significant liquidity challenges. Due to their failure to hedge, they were unable to secure new funding at the higher market rates. To compensate for the hit to their capital and free up liquidity, SVB decided to sell the few swaps they held since they were "in the money". While SVB justified this action as a means of "focusing on net interest income," it was a short-term solution that came at the expense of the bank's long-term viability

7) SVB is aware of the economic value exposure issue, given their significant holdings of unhedged fixed bonds on their repricing gap and their decision to sell the few swaps they had. As a result, they are highly vulnerable to interest rate increases. The bank decided to omit their EVE exposure from their 2022 financial report, which is the first time they do this vs prior year reports. This goes against regulation, as any bank over $10bn is obligated to report EVE in their financial report (as highlighted in a previous post).

8) The Federal Reserve's narrative of wanting to combat inflation at any cost led to a further increase in interest rates. Consequently, the value of SVB's bonds, which were yielding around 0.5%, decreased significantly since the current market rate for bonds was substantially higher.

9) As liquidity and capital continue to deplete at an alarming rate, SVB has no choice but to sell the treasury bonds at a loss to free up liquidity. However, given the depletion of capital, they also sought to raise additional funding through shareholders.

10) Investors and depositors became apprehensive, leading depositors to withdraw their funds in a bank run. The issue was compounded by the concentration of depositors, particularly those sitting out with the maximum deposit guarantee, which further amplified the problem of the bank run.

11) SVB collapses.

The collapse of SVB serves as a cautionary tale for financial institutions about the importance of risk management and hedging strategies. The bank's failure to hedge its bonds and its decision to sell the few swaps it held to free up liquidity ultimately proved to be short-term solutions that came at the expense of the bank's long-term viability. The concentration of depositors and investors also amplified the bank run problem, leading to the bank's ultimate collapse. The events that unfolded at SVB serve as a reminder of the importance of proper risk management and financial oversight, particularly in times of economic uncertainty.