The full picture of why Silicon Valley Bank failed so spectacularly and so fast has not yet come into focus. But uncommon lending practices at the cutting-edge lender contributed to its woes and raise questions about risk management by its executives and board, analysts said. These lending practices may also explain why there has been no merger of the institution with a healthier bank as typically occurs when the Federal Deposit Insurance Corp. steps in as it did with Silicon Valley Bank last week.
For example, of the roughly $74 billion in total loans Silicon Valley Bank held on its books at year-end, almost half — $34 billion — went to borrowers who used the money to buy or carry securities of their own, regulatory data shows. Other lenders make such loans but in far smaller amounts, filings show.
For now, things have calmed down at the bank following an extraordinary move by the federal government to guarantee all its deposits, even those over the usual FDIC limit of $250,000. The institution continues to operate under new management and a new name — Silicon Valley Bridge Bank.
Amid its collapse, the bank is being investigated by federal prosecutors and the Securities and Exchange Commission and investors are worried about the health of other U.S. and global banks. On Thursday, Treasury Secretary Janet Yellen testified before Congress about tumult in the nation’s banking system, promising to take “a careful look” at what happened at Silicon Valley Bank.
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As 2022 came to a close, Silicon Valley Bank had $175 billion in deposits and roughly $74 billion in loans. While the bank made loans to homebuyers, commercial real estate borrowers and California winemakers, the 40-year old institution went all in on the burgeoning tech and startup company sector. Silicon Valley Bank was the first to create loan products for startup companies, according to its website.
This led to the unusual securities-related loans dominating Silicon Valley’s portfolio, said Bill Moreland, chief executive of BankRegData, a provider of bank regulatory statistics and analysis.
While the precise details surrounding these loans are not specified, that’s a heavy concentration of risk among one borrower group. What’s more, instead of having easy-to-value assets like a home or commercial building backing these loans, they’re backed by unidentified securities which may also have declined in value as interest rates rose and the tech sector fell.
That these loans make up such a large proportion of the bank’s portfolio is notable, Moreland said, pointing to dubious risk management at the bank. The loans also may explain why Silicon Valley has not been acquired or merged with a healthier institution, he said.
“Typically, if you looked at a bank with a $74 billion loan book, other banks would be interested in buying that,” he said in an interview. “But when 46% of your loan book is to purchase and carry securities, a lot of banks would have to ask themselves ‘What is the value of those loans?’ ‘Is that an attractive asset?’”
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Other banks make such loans, but in much smaller doses, regulatory documents show. J.P. Morgan Chase, for example, had $14 billion in these loans on its books at year-end, the next largest amount held by a bank, according to BankRegData. But with J.P. Morgan Chase’s $1.1 trillion in total loans, the securities-backed loans make up just 1.3% of its lending.
The loans are almost certainly a part of what Silicon Valley called its “Global Fund Banking” portfolio. According to the bank’s year-end financial statements, some 56% of its total loans fell into this bucket. Included were loans the bank made to private equity and venture capital firms to be repaid by investors in their funds when the firms request more capital from them.
Another type of loan the bank favored was known as venture debt, according to a white paper on its site. In it, the bank described how it made loans to startup companies of between 25% and 30% of the amount the companies had most recently raised in private transactions with investors. Unlike other business loans that are based on a company’s cash flow or assets, this kind of venture debt relies on a company’s ability to raise additional capital from investors later to repay the loans, the website says.
A problem with this kind of lending arises when a startup company cannot raise fresh capital from investors to repay the loans or can do so only at a lower valuation from previous money-raising rounds. In the startup world, this situation is known as the dreaded “down round” of financing, which requires a total valuation of a company at the new, lower level.
