The Treasury Department is right to ensure that investors at Silicon Valley Bank have access to their deposits.
. This matters because SVB was an important part of the venture capital ecosystem. The bank enjoyed rapid growth. Before its collapse, it was the country’s 16th-largest bank. In December 2021, before the equity market correction in emerging technology stocks, the share price of SVB approached $800. To investors, SVB was a high-technology stock. Over 98% of SVB’s stock was owned by very large institutions. The shares owned by those institutions, and all other equity investors, are now worth zero.
In March 2022, the Federal Reserve raised interest rates by 0.25%. In June 2022, the Federal Reserve started to raise interest rates aggressively, a 0.75% increase. At that time, the management of SVB should have hedged its asset portfolio against a sharp rise in interest rates. The bank did not.
As the Federal Reserve withdrew liquidity from the financial system, capital flows into the VC space slowed. VC firms with assets"parked" at SVB began to withdraw their deposits. SVB had a problem. At the beginning of last week, market rumors circulated that SVB had a severe duration mismatch between liabilities and assets. SVB sold assets at a loss. SVB tried to raise capital. It was too late. The VC herd began a run on the bank. The federal government closed the bank.
Still, the Treasury Department was right to move quickly. It had to avoid the risk of a national financial meltdown.
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