![]() They don’t always show how much the borrower will pay back overall, since the interest is rarely accounted for in the initial loan amount.Loans in the form of a monthly payment can be deceptive.Often provide a more straightforward process than other types of loan.Are easier to track, as the payment amount for each month is calculated in advance.Offer a clear, set monthly payment for the borrower (there are no surprises).When a loan’s principal is paid off in a single lump sum at the end of the term. When a loan’s principal is paid back in monthly installments along with any interest payments. It was the structural tension between a large quantity of assets whose yields were not going to rise for years and liabilities which were more interest rate sensitive than those of the average bank which led to SVBs problems.There are two ways a loan’s principal is paid back. ![]() As its deposit base more than doubled in a short period, SVB invested most of those additional deposits into long dated fixed-rate government bonds, and much less into new lending. This structural problem in SVB’s balance sheet came about because during the boom years of 20 SVB’s VC clients enjoyed large cash inflows which they deposited with the bank. SVB was stuck with long dated bonds with low yields, which meant it would take longer for its portfolio to roll over and allow it to begin to earn higher yields. Most banks own a lot of floating rate loans that pay more when rates rise. A typical bank might hold around 25% of its assets in long term debt. In the same report, on the proportion of total bank assets held in securities SVB was first, at 55 per cent. As a result, SVB’s margins came under pressure faster than those of most banks. They demand higher interest rates on their deposits as soon as they see rates rise. SVB had a large proportion of large business depositors, and large business depositors are extremely price sensitive. SVB was 99th in the proportion of its deposits that were under $250,000, at less than 3 per cent. Rather, SVB’s problems came from the way it chose to structure its balance sheet, holding a much larger proportion of its assets in long-term Govt bonds than most banks while having a greater proportion of large, more interest-rate-sensitive, depositors than most banks.Ī report from RBC Capital Markets ranked the 100 largest US banks in terms of various balance-sheet characteristics. SVB’s problems did not come from its portfolio of loans to VC-backed companies. The demise of SVB does not indicate a problem with the credit quality of venture debt, or any issues with the venture debt model. We are now at the fifth paragraph in this article and there has been no mention of the quality of SVBs loan book making any contribution to the problem. In his annual letter to shareholders Jamie Diamon the CEO of JP Morgan Chase put it this way: “Ironically, banks were to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements,” However, the decline in value caused a panic, which caused an old-fashioned bank run, which lead to SVB becoming illiquid. A future decline in rates will restore part or all of that value. The rapid rise in rates put a dent in their current market value. The problem is that their long time to maturity, their long duration, makes them the bonds whose value is most impacted by changes in interest rates. The assets in question, long dated Government securities, continue to have the best credit ratings, continue to pay their coupons and will eventually be redeemed for full face value. In SVB’s case there is no talk of impaired assets or defaults. The intrinsic value of these assets tanked. Mortgage-Backed Securities turned out to be poorly structured, much riskier than they were rated and as borrowers began to default, they became impaired, in some cases to the point of near worthlessness. The GFC was caused by very poor asset quality. However, the problems that lead to the demise of SVB are completely different from the problems that lead to the Global Financial Crisis (GFC). Silicon Valley Bank (SVB) was an integral part of the VC landscape and its collapse sent shockwaves through global markets, triggering a cascade of events that reverberated across various sectors.
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