Investment Final Team Report
Team Members:
411179021 企管二 陳庭葳
411179022 企管二 李姿儀
411179038 企管二 陳小屏
411179051 企管二 張芸甄
411179090 企管二 王心妘
411179092 企管二 陳緣欣
Part1: Point out, period of time
The firm:Silicon Valley
Dramatic drop:(2023/3/9-10)Trading was suspended after a continuous two-day drop of
over 60%.
Part2
Trend: Fed Raised interest rate → SVB sold a large amount of long-term bonds and funds
Part3
A.（李姿儀、陳緣欣）
Silicon Valley Bank (SVB), established in 1983 and headquartered in Santa Clara,
California, is a commercial bank with a 40-year history. In addition to branches across the
United States, SVB has locations in the UK, Germany, Israel, and Asia. In March 2023, SVB
was confirmed to have collapsed and was subsequently acquired by First Citizens Bank.
SVB's operations are divided into four sectors: Global Commercial Bank, SVB Private
Bank, SVB Capital, and SVB Securities. Besides providing loans to venture capital-backed
startups, SVB also invests in private equity and venture capital funds. The company is
dedicated to supporting the tech startup industry, making it a preferred choice for many startups,
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venture capitalists, and other entities in the tech and life sciences sectors. It is considered one of
the leading banks in the entrepreneurial ecosystem.
SVB's clientele is concentrated in the tech industry startups, with a high proportion of U.S.
startups holding their funds at the bank. As of the end of 2022, SVB's total assets amounted to
$211.8 billion, making it the 16th largest bank in the United States and the bank with the most
deposits in the Silicon Valley region.
B.（王心妘、張芸甄）
1. Why did the firm’s stock price sink?
Because the epidemic devastated the economy, the Federal Reserve System began to
provide funds to promote the economy. New startups absorbed large amounts of cash from the
market by financing or fundraising activities. Thus, deposits increased significantly, so SVB
used the withdrawals that the startups deposited to purchase numerous long-term bonds.
However, SVB ignored the risk of the long-term bonds bought. (when the interest rates
increase, the prices decrease). In order to suppress inflation, the Fed started to raise the interest
rates, this caused long-term bond prices to fall due, and it also made it difficult for new startups
to raise funds(because the willingness to invest was declining), and the money deposited in
banks became less.
In 2022, SVB liquidity became tighter, and depositors of new startups began to withdraw
their money from SVB. SVB lacked money, so they needed to borrow money from FHLB.
The lower liquidity forced SVB to announce the plan to sell the 21 billion bonds and
recognize a $1.8 billion loss. Finally, SVB declared that they were going to increase capital and
exposed its liquidity crisis, this action aroused people's distrust, and most of them took their
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money, about $420 billion, from SVB, which caused the bank run(擠兌). In the end, the stock
price fell dramatically and the bank was closed.On March 26, 2023, First Citizens Bank
acquired Silicon Valley Bank, which now operates as a division of First Citizens Bank.
2. Is there any sign before the event occurred?
We think there are two critical signs: the first one is excessive long-term bonds held by
SVB, which caused SVB to take overloading risks of interest rate and liquidity; the second one
is inflation, which forced FED to conduct a sudden interest rate rise and resulted in a decrease
in prices of long-term bonds. Due to the above signs, SVB suffered a loss in investment and
lost the inventors’ trust. In the end, the stock price of SVB decreased dramatically.
3. What kind of recent world event could affect the performance of the underlying
product?
The world events affecting the performance of the underlying product include the
pandemic of Covid-19 and announcement of raising interest rate from the FED.
C-1.What are the consequences （陳庭葳、陳小屏）
1) Impact on the U.S. banking system
The systemic threat to the U.S. banking system posed by the collapse of Silicon Valley
Bank is relatively low. This is primarily due to the bank's relatively smaller size and
insufficient capital liquidity in comparison to well-established large banks. Consequently, it
cannot withstand sustained and substantial interest rate hikes by the US Federal Reserve. While
this event may impact the venture capital ecosystem, its repercussions will be confined to
related industries and are unlikely to trigger a wave of bank failures.
The inadvertent and significant impact on the U.S. banking system resulted from the
measures implemented by the U.S. before to Silicon Valley collapse. These measures which
managed to prevent excessive panic among investors and the general public. Notably, both
Silicon Valley Bank and Signature Bank allowed depositors access to their funds until March
13 of that year. Additionally, the agreed-upon emergency funds ensured that any federally
insured depository institution, including banks, thrifts, or credit unions, could provide loans
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against assets held to maturity, thereby bolstering depositor trust in the banking system.
Overall, confidence in the U.S. banking system served as a safeguard for all deposits.
2) Impact on U.S. new industries
According to previous statistics from Silicon Valley Bank, nearly all technology and
biotech start-up industries in the United States are customers of the bank. The total funds
managed by Silicon Valley Bank amount to approximately US$342 billion, with loans
reaching as high as US$74 billion. Therefore, the incident had a significant impact on the
venture capital industry.
For example, the following picture is the stock market changes of MobvistaInc in March
2023:
3) The Fed’s approach
The reasons for the collapse of Silicon Valley Bank in the United States were the actions
of the Federal Reserve that had a great impact both before and after. First of all, in 2022, the
U.S. inflation rate will rise rapidly, and the Federal Reserve will quickly raise interest rates.
Since Silicon Valley Bank mainly provides funds for local venture capital companies, once the
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news comes out, most industries will not be able to finance and can only Sell deposits held in
banks. The effect of this series of losses caused a massive loss of funds in Silicon Valley banks
within a few days, causing the banks to urgently sell their remaining securities assets, which is
the so-called run effect.
As a result of the U.S. Federal Reserve's rapid interest rate hikes, Silicon Valley Bank
declared bankruptcy in less than ten days. The Federal Reserve immediately slowed down the
pace of interest rate hikes to slow the financial impact of the liquidity crisis from spreading to
the wider market.
4) BTFP
BTFP is the abbreviation of Bank Term Funding Program, which means bank term
financing program. It mainly provides banks, savings associations, credit unions, and other
qualified depository institutions with mortgages of U.S. Treasury bonds, agency debt and
mortgage-backed securities, and other qualified assets. Collateral loans are available for up to
one year.
After the collapse of Silicon Valley Bank, the U.S. Federal Reserve immediately enacted
this emergency loan program to increase liquidity in the financial system. Since the collapse of
Silicon Valley Bank caused a wave of bank runs among investors, some banks still suffered
from financial difficulties caused by insufficient liquidity after the incident. To prevent the
continued spread of bank run effects, BTFP can effectively increase the short-term liquidity of
banks, thereby Reducing the spread of its runs to protect the U.S. banking system and prevent
financial crises like Lehman Brothers in 2008.
C-2. What is this event linked to the worldwide economy
Because most of SVB's clients are pre-listed venture capital, private equity funds, and
derivative startups, the overall risk should not cause systemic problems. In addition, the U.S.
government had taken immediate action to control the impact of the collapse of SVB, so the
worldwide economy wasn't affected by this event dramatically. The influences of other
countries’ economies are as follows.
1) The UK
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Silicon Valley Bank UK (SVBUK) declared bankruptcy on the evening of March 12. The
Bank of England has decided to sell SVBUK to HSBC UK Bank PLC. This action has been
taken to stabilize SVBUK, ensuring the continuity of banking services, minimizing disruption
to the UK technology sector, and supporting confidence in the financial system.
According to BBC news reports, Chancellor Jeremy Hunt told them there was no risk to
the UK's financial system as a whole from the collapse of SVB, but "there is a serious risk to
some of our most promising companies in technology and life sciences''. The government will
continue to support their world-beating technology sector and all the high-skilled jobs.
2) Taiwan
According to a survey by the Financial Supervisory Commission, Taiwan's domestic
banks, insurance companies, and securities firms, have no exposure to Silicon Valley Bank of
the United States; in terms of funds, only investment trust funds have an exposure of NT$300
million to Silicon Valley Bank.
The MOEA Minister said that the impact was mainly on the U.S. startup community,
while the impact on Taiwan was not significant.
3) China
SVB has a Chinese joint venture, SPD Silicon Valley Bank, which was set up in 2012 and
targeted the country’s tech elite. Therefore, the collapse of SVB has caused widespread
concern in China, where at least a dozen firms have issued statements trying to pacify investors
or clients, saying that their exposure to the lender was limited. Most of them were biotech
companies.
It was not immediately clear how many China-based startups had SVB accounts.
However, the U.S. government is tonifying the data of Chinese companies that may open
accounts in regional banks in the United States, and trying to estimate how many of these
companies are exposed in this wave of banking storms, which is more severe than the data
published by Chinese officials and enterprises themselves. The key to the U.S. government's
concern is whether China has a wider range of financial risks.
4) Gold Futures
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The US Silicon Valley bank bankruptcy crisis has spread. Although the US government
has stepped in to rescue the bank, the panic of investors has been reflected in the gold price,
increasing gold buying sentiment.
On March 13th, the US gold futures price reached a new high in 5 weeks, mainly because
the SVB bankruptcy crisis had spread, causing funds to flow into the relatively stable and
value-preserving gold market for risk aversion.
5) Other Countries
Many governments said that the impact was limited. For instance, French Finance
Minister Le Maire said that the incident does not pose any risk to the French banking industry.
Because the French banking system is stable, no special warning has been issued. In addition,
Singapore's KHNK said that the local banking system has low risk exposure to Silicon Valley
banks.
D. What are the lessons we can learn from it
陳庭葳
The collapse of Silicon Valley Bank is a very classic application of systemic risk and
idiosyncratic risk. After reading many articles and analyses, it turns out that the scope of
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influence of systemic risks does not necessarily extend to the whole world. The impact of one
country or one region can also be regarded as a small-scale systemic risk.
From the Federal Reserve raising and lowering interest rates, to changes in inter-industry
deposits, investor actions, and changes in funds within banks, it ultimately leads to large and
small impacts on the financial environment.
These are the knowledge we have learned in textbooks, but if I want to explain the ins and
outs, I may not be able to determine it clearly. However, through this case study, I was able to
understand thoroughly how banks in the real world respond to crises, and how they respond
and propose relevant measures in the future.
王心妘
After finishing this presentation, we can find that three main reasons caused the SVB
closed. First, the FED announced to raise the interest rate to suppress inflation, in the financial
management class, we learned that if the interest rate increased, the bond price would decrease,
so the investor preferred to save the money, and this caused the startup companies hard to
absorb money from the market, so they need to take their deposit back from the SVB.
Second, SVB does not have good risk management, they put a high percentage of their
assets in long-term bonds, Although long-term bonds have higher returns than short-term
bonds, but also, it have higher risk, I think SVB should plan their assets appropriately, not just
buying many long term bonds and ignore the risk.Third, after the public knows the bank has
some financial troubles, they run to a bank to take their money out, I think this is the last straw
that breaks the camel's back.
So, in this case study, l have understood that the Fed policy can have huge influence on
banks, and if banks can not respond perfectly, it will cause a large impact on financial
economies. All the decisions and methods the government or banks made were very important,
it would affect a lot of people. In conclusion, I have learned a lot from the report and
understood how the financial markets affect our lives. I think that both financial institutions
and investors should consider the risk before investing in bonds or stocks.
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陳小屏
In my opinion, the collapse of Silicon Valley Bank not only affects the market economy
but also serves as a reminder for investors to always consider the risks when investing. It's
crucial to avoid blindly investing in large-scale ventures. Therefore, assess the risks and
evaluate our own capabilities before committing to any investment.
Additionally, liquidity is something to be mindful of while investing. In this case, SVB's
closure was partly due to its heavy investment in long-term bonds, which resulted in poor
liquidity. This lack of liquidity prevented the bank from responding promptly to the Fed's rate
hikes, leading to further repercussions. Therefore, it is important to consider how to reduce
investment risks while ensuring diversification and liquidity.
Furthermore, governments should be vigilant about market changes when developing
policies to avoid having an extreme impact on the financial economy. While one of the causes
of SVB's closure was the Fed's continuous interest rate hikes, the swift response from the U.S.
government effectively mitigated the event's impact on the financial economy. In this event,
how to prevent similar occurrences will be a focal point for the U.S. government to consider, as
well as other countries.
陳緣欣
The primary reason for VBS's eventual collapse was the lack of proper “risk
diversification.” The proportion of MBS in their total assets was too high. Moreover, the
pandemic led to a sequential tightening of liquidity, which was exacerbated by the Fed's
aggressive "interest rate hikes." This caused the value of bonds to drop directly, resulting in
significant losses. Additionally, most of the VBS's clients were startups. When faced with
common issues, these clients would collectively withdraw their funds from the bank, much like
a herd effect.
I thought that SVB should have implemented timely “hedging strategies’’ to mitigate risk,
instead of continuing to hold onto bonds whose value kept declining due to the Fed's interest
rate hikes. However, SVB chose to issue new shares to the public when their bonds were
already losing value, which only increased investors’ panic. Consequently, the stock market
saw a drop of over 50% in two days, leading to a trading halt.
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Working on this report not only gave me a deeper understanding of SVB as a company but
also made me realize how close the financial sector is in our daily lives. However, I
acknowledge that there is still much to learn. Beyond textbook knowledge, understanding
real-world cases can also help us grasp the intricacies of global finance.
張芸甄
Through the shutdown of SVB, I know the importance of risk management. Even if SVB
invested most of its funds in the U.S. Treasuries, which are classified into risk-free assets, it
ignored that risk-free assets aren't really 'risk-free'; the longer the expiration period, the greater
the fluctuation of interest rates, and the liquidity risk will increase gradually; obviously, SVB
didn't evaluate current market conditions and reserve enough money in case, and invested large
amounts of funds in long-term bonds that are easily influenced by interest rates. As expected,
when the Fed started to raise interest rates, SVB couldn't handle problems coming thick and
fast, including that the long-term rates decreased, startups withdrew their deposits from the
bank, and investors' untrust to SVB. The development of the entire event is observable and
expected.
To summarize the above, I learned three things. First, 'don't put all your eggs in one
basket'. To gain less money is better than to suffer big losses. Next, 'don't be blinded by what
you see', it's very important to think about the future. Maybe the economy is booming and
interest rates are great for you, but it also represents interest rates will decrease shortly. Such an
interest rate trend is supported by numerous historical cases and can be said to be an inevitable
result.
Last but not least, it's important to choose proper investment targets. Depending on the
economic environment, choosing the right investment targets at the right time can help you
profit. Take the SVB case as an example, the Fed's implementation of quantitative easing
means that the economy will begin to recover; simultaneously, the long-term interest rate has
reached its peak and short-term rates will grow gradually. At this moment, you should invest in
short-term bonds to get higher or stable returns at a lower cost.
李姿儀
I believe that the error in investment decision-making is a significant factor in causing this
event and something to be cautious of in the future. The influx of substantial funds into banks
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requires proper investment channels to generate returns to cover interest payments to
depositors. The movement of funds, or the "new asset allocation" investment decision, was a
misstep. Silicon Valley Bank's operational strategy was flawed partly due to insufficient
understanding of asset characteristics. Government bonds are not a guaranteed profit
investment, and their price fluctuations are not necessarily mild. In this case, it is evident that
the changes brought about by interest rate adjustments were drastic.
Silicon Valley Bank's decision to invest at least $100 billion in long-term US government
bonds was problematic: using short-term deposits for long-term investments, coupled with a
high proportion of investment relative to bank deposits, led to losses when interest rates rose.
This subsequently triggered a funding gap and a ripple effect.
This case made me realize that investment decisions in real life must be carefully
considered. Investing requires precise timing and can easily lead to snowballing effects.
Additionally, the policies set by central banks or adjustments in interest rates have a significant
impact on the entire market, requiring investors to constantly monitor and respond to market
changes. Although the knowledge learned in textbooks serves as a foundation, I understand the
importance of learning to diversify risks and closely monitor financial trends to avoid losses
and generate returns.
Part4: Conclusion
These reflections on the collapse of Silicon Valley Bank offer a comprehensive
understanding of the intricate dynamics at play in the financial sector. Each commentator
highlights crucial aspects contributing to the bank's downfall, ranging from the Federal
Reserve's interest rate decisions to SVB's flawed risk management strategies and inadequate
diversification of assets.
The consensus among the commentaries is that the SVB's collapse underscores the
importance of risk management and prudent investment decision-making. The reliance on
long-term bonds without adequate hedging strategies left the bank vulnerable to interest rate
fluctuations, leading to significant losses. Moreover, the herd effect triggered by the
withdrawal of deposits by startup clients further exacerbated the situation, highlighting the
interconnectedness of financial institutions and their clients.
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These reflections emphasize several key lessons for investors and financial institutions
alike. First, the importance of diversification cannot be overstated; spreading investments
across different asset classes can mitigate risks and guard against unforeseen market
developments. Second, maintaining liquidity is essential for responding effectively to changing
market conditions and unforeseen events. Third, understanding the broader economic
landscape and central bank policies is crucial for making informed investment decisions.
Overall, the collapse of Silicon Valley Bank serves as a cautionary tale, prompting
stakeholders to reevaluate their risk management practices and investment strategies in a
dynamic and interconnected financial environment.
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