In summary, SVB was a very risky bank in terms of
- client & business mix
- liquidity management
- interest rate risk management
- governance.
Was SVB a typical bank?
SVB was far from a typical bank since it had a focus on being the bank at the heart of the venture capital ecosystem. Most of its banking business was being made with start-up companies mainly in the tech and bio-tech sectors. As a result, its customer mix was very concentrated, and the lack of diversification was compounded by its specific clients being early-stage companies which are particularly vulnerable in a world with costlier and less access to money. Hence, we already have the first red flag associated with SVB.
When their start-up clients raise funding, they deposit the cash at SVB, and then draw it down as they burn cash in their business. The chart below illustrates that providing loans to its clients was only a small part of their business model. The main part of its business was to store its clients' funds as deposits (as long as its clients didn't need their cash). This resulted in an unusually low loan to deposit ratio around 40-50%. As a comparison, the median loan to deposit ratio for large US banks is around 80% and around 100% for large European banks. In other words, large US and European banks have much more balanced business profiles.