The SVB Banking Collapse and Its Impact on Private Lenders

Silicon Valley Bank (SVB) was a regional bank that specialized in serving the tech industry, especially startups and venture capital firms. It was founded in 1983 and grew to become the 16th largest bank in the US, with $210 billion in assets at the end of 2022. However, on March 10, 2023, SVB collapsed after a bank run and a capital crisis, marking the second-largest bank failure in US history and the largest since the 2008 financial crisis.

The collapse of SVB was the result of several factors that converged in a short span of time. One of them was the Federal Reserve's aggressive interest rate hikes, which started in 2022 to combat inflation. Higher interest rates hurt the tech sector, which had benefited from low borrowing costs and high valuations during the pandemic-era boom. Higher interest rates also reduced the value of SVB's bond portfolio, which consisted mostly of long-term Treasury and mortgage bonds that had low yields. Add on the slowdown in the tech industry's fundraising and IPO activity, which reduced the demand for SVB's services and deposits, it was clear to see the issues. Many startups withdrew their deposits from SVB to keep their businesses afloat in a challenging environment. Some of SVB's prominent clients, such as Founders Fund, a venture capital fund led by Peter Thiel, pulled out all their funds from the bank.The lack of confidence in SVB's management and financial position played another large factor. On March 8, 2023, SVB announced a $1.8 billion loss on the sale of securities, including its bond holdings, and revealed plans to raise more than $2 billion in capital to shore up its balance sheet. This triggered a panic among investors and depositors, who feared that SVB was insolvent or facing a liquidity crisis. SVB's stock price plunged by 60% on March 9, 2023. Michael Burry, an investor known for predicting the subprime mortgage crisis, compared SVB to Enron, a notorious corporate fraud case. The final blow came on March 10, 2023, when SVB faced a massive bank run, as depositors rushed to withdraw their money from the bank. SVB could not generate enough cash to meet the demand and ran out of liquidity. As a result, California regulators closed down SVB and placed it under the control of the Federal Deposit Insurance Corporation (FDIC), which will liquidate the bank's assets to pay back its customers.

The collapse of SVB is not unprecedented in US history. There have been several banking crises and failures over time, some of which had similar causes or consequences as SVB's collapse. To understand, we invited guest speakers Brock Freeman and Chris Carsley of Kirkland Capital Group to share information in an educational class. Chris started by sharing some history about this past year.

“What we saw out of 2022 is really interesting. Both equity and fixed income took a major negative hit. It's the fourth time that both equity and fixed income have gone down simultaneously. The one thing that made this very different in 2022 was it was the biggest downfall of both asset classes simultaneously that we've seen in history. It really woke up a lot of people on what they should be doing on that fixed income side. Right now, you're seeing a huge dislocation between rising interest rates and the supply and demand imbalance created by these bank failures.”

Chris continues with saying that as an investor, you should reach out to your financial advisor and seriously think about what you are doing on the fixed income side, because there is lots of opportunities to generate yield without having to go out on the risk curve, and you can find it to be an excellent addition to a traditional investment portfolio.

The collapse of SVB had a significant impact on private lenders. In the recent class by Brock Freeman and Chris Carsley, they also share that “what is happening in the banking industry is having a huge impact on lending and affecting all private debt – consumer, corporate, venture, real estate - so you're seeing a decrease in lending lines. Banks are increasing their debt service coverage ratios and other aspects of what they'll lend to.”

The SVB's collapse truly increased the risk perception and uncertainty in the private lending market. Many private lenders relied on SVB as a trusted partner and intermediary for their transactions with borrowers or investors. For example, some private lenders used SVB as a custodian for their loan. With SVB gone, some private lenders had to find new ways to secure their assets or collect their payments from borrowers or investors. Some borrowers or investors also became wary of dealing with private lenders who had exposure to SVB or who operated in the tech sector.

On the flip side, some private lenders were able to capitalize on the disruption and demand in the market. Some private lenders saw an increase in their customer base or loan volume as they filled the gap left by SVB or offered better terms or services than other competitors. Following the collapse of a major bank like SVB, investors also sought alternative investment opportunities outside of traditional banking channels. This could have included exploring private investments, peer-to-peer lending, or other non-bank financial institutions that emerged as potential alternatives to traditional banking services, like self-directed IRA custodians. A high demand for alternative lending options was created.

Peer-to-peer lending through self-directed IRAs, also remained fairly untouched by the chaos. Some self-directed IRA custodians provided outlets to connect borrowers directly with lenders, which could have provided increased interest and investment possibilities. Investors looking for potentially higher returns or diversification could have explored opportunities. Such institutions, like Quest Trust Company, could have provided diverse investment opportunities across various asset classes.

It's important to note that investing in alternative assets carries its own risks and considerations, including specialized knowledge requirements, and investors should conduct thorough research, due diligence, and consult with financial professionals before venturing into alternative investments. But understanding the SVB collapse, its effects, and some of the possible solutions to reduce your investment risk could be the answer to problems many private lenders experienced. If you are curious about learning more about private lending or using alternative investing vehicles like self-directed IRAs, call our specialists today.