HomeUS News updateUnusual lending practices at Silicon Valley Bank contributed to the banks's woes

Unusual lending practices at Silicon Valley Bank contributed to the banks’s woes

The full picture of why Silicon Valley Bank failed so spectacularly and so rapidly is yet to come into focus. But the cutting edge lender’s unusual lending practices contributed to its woes and raised questions about risk management by its executives and board, analysts said. These lending practices may also explain why the institution has not merged with a healthy bank, as is usually the case when the Federal Deposit Insurance Corp. steps in as it did with Silicon Valley Bank last week. Was.

For example, of the nearly $74 billion in total loans at Silicon Valley Bank at the end of the year, nearly half — $34 billion — went to borrowers who used the money to buy or carry their own securities, regulatory data show. Show. Other lenders make such loans but for much smaller amounts, the filings show.

For now, things have been quiet at the bank after an extraordinary move by the federal government to guarantee all its deposits, even those that exceed the normal 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 under investigation by federal prosecutors and the Securities and Exchange Commission and investors are concerned about the health of other US and global banks. On Thursday, Treasury Secretary Janet Yellen testified before Congress about the turmoil in the nation’s banking system, and promised to keep a “careful eye” on what happened at the Silicon Valley bank.

As 2022 approached, Silicon Valley Bank had $175 billion in deposits and about $74 billion in loans. While the bank made loans to homebuyers, commercial real estate borrowers and California winemakers, the 40-year-old institution moved into the all-growing tech and startup company sector. Silicon Valley Bank was the first bank to create a loan product for startup companies, according to its website.

This led to unusual securities-related loans dominating Silicon Valley’s portfolios, said Bill Moreland, chief executive officer of BankRegData, a provider of bank regulatory statistics and analysis.

While the exact details around these loans are not specified, it is a heavy concentration of risk among one borrower group. What’s more, instead of having easy-to-appreciate assets such as a home or commercial building backing these loans, they are backed by unknown securities, which also decline in value as interest rates rise and the tech sector declines. Can

Moreland pointed to questionable risk management at the bank, saying that these loans make up such a large portion of the bank’s portfolio that it is noteworthy. Debts may also explain why Silicon Valley hasn’t been acquired or merged with healthy institutions, he said.

“Typically, if you look at a bank with a $74 billion loan book, other banks are interested in buying it,” he said in an interview. “But when 46% of your loan book is buy-and-carry securities, a lot of banks have to ask themselves ‘what are those loans to value?’ ‘Is it an attractive property?'”

Other banks make such loans, but in much smaller amounts, regulatory documents show. JPMorgan Chase, for example, had $14 billion in these loans on its books at the end of the year, according to BankRegData, the next largest amount held by a bank. But of JPMorgan Chase’s $1.1 trillion in total loans, securities-backed loans account for just 1.3% of its lending.

The loans are almost certainly part of Silicon Valley’s “Global Fund Banking” portfolio. According to the bank’s year-end financial statements, approximately 56% of its total loans fell into this bucket. This included loans made to private equity and venture capital firms, which were to be repaid by investors in their funds when the companies requested more capital from them.

According to a white paper on its site, another type of loan that the bank preferred was known as a venture loan. In it, the bank explained how it lent startup companies between 25% and 30% of the amount recently raised in private transactions with investors. Unlike other business loans based on the company’s cash flow or assets, this type of venture loan relies on the company’s ability to raise additional capital from investors to later repay the loan, the website says.

Problems with this type of lending arise when a startup company cannot raise fresh capital from investors to repay the loan or can only do so at a lower valuation than previous fundraising rounds. In the startup world, this situation is known as the dreaded “down round” of financing, which requires taking the company’s total valuation to a new, lower level.

Tech and startup valuations have declined significantly since Silicon Valley Bank assets and deposits peaked in 2022; Even well-financed mature technology companies are laying off thousands of employees as their fortunes flag. This scenario suggests problems with the bank’s enterprise lending business.

A spokeswoman for Silicon Valley declined to answer questions about the bank’s risk management, its focused loan portfolio or how its loans are rated given the decline in operations for technology and startup companies in recent months.

One factor that contributed to the bank’s collapse affected other lenders as well: rising interest rates hurt the way these institutions invested in United States Treasury debt and mortgage-backed securities. When interest rates rise, newly issued debt securities yield higher yields than previously issued instruments, making older securities less valuable. In fact, the average yield on Silicon Valley’s debt securities portfolio stood at about 1.6% at the end of the year, the bank’s financial filings show. That’s about half the level these kinds of securities now yield.

When customers rushed to get their money out of Silicon Valley Bank, it had to sell some of these securities, losing $1.8 billion.

Moreland said that facing a flood of withdrawals from depositors exposed another flaw in the bank’s operations. The Silicon Valley bank had an unusually small cash cushion — just $12 billion, or just 5% of its assets, regulatory filings show. California banking officials said that last Thursday alone, the bank redeemed more than $40 billion from depositors.

Other banks have much larger cash positions. At the end of the year, about 19% of Citibank’s assets were in cash.

During the better days at the Silicon Valley bank, its deposits were growing faster, perhaps much faster than could be managed, analysts said. Deposits jumped to $183 billion in 2020 from $57 billion a year ago. When the bank collapsed, only 5.7% of deposits were insured, filings show, compared to 40% at JPMorgan Chase.

Silicon Valley Bank’s securities filing touts its board’s oversight of risks in its operations, saying “risk management is carefully considered by the board in oversight of the company’s strategy and business, including financial, reputational, regulatory, legal and compliance implications.” goes.”

A member of the bank’s risk committee was Mary Miller, a former high-ranking Treasury Department official under President Obama and a board member of Silicon Valley Bank since 2015. Miller now leads a committee of the bank’s directors that submits possible proposals for its loans and weighs. Reorganization of its business.

A spokeswoman for Silicon Valley Bank declined to make Miller available for an interview.

Moreland said of Silicon Valley Bank, “It was a party and the music kept playing and the money kept flowing.” Then, suddenly, it stopped.



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