Elon Musk Says He Is Open To Buying Crisis-Hit Silicon Valley Bank

US-based Silicon Valley Bank, which is facing a failure after it disclosed losses, saw its share prices fall by a steep 60 per cent in a day on Friday. Now, as the crisis has gripped the company, Tesla and Twitter CEO Elon Musk said he is open to buying it.

“I’m open to the idea,” Musk said in a tweet, in response to a tweet by Razor co-founder and CEO Min-Liang Tan who said that “I think Twitter should buy SVB and become a digital bank”.

Silicon Valley Bank, which is one of the largest commercial banks in the US, has relationships with over 50 per cent of all venture-backed companies in the US and countless venture capital (VC) firms.

The crisis at Silicon Valley Bank worsened after the company sent a letter to shareholders informing that it will try to raise over $2 billion in capital after taking losses. This triggered mass sell-off in the company’s shares, which fell a steep 60 per cent in a day.

SVB’s financial profile benefits from an abundance of client funds, which includes on-balance sheet deposits and off-balance sheet client investment funds. Its average client funds were at a high at $348 billion in Q4 2022.

The SVB Crisis

SVB in 2021 saw a mass influx in deposits, which jumped from $61.76 billion at the end of 2019 to $189.20 billion at the end of 2021. As deposits grew, SVB could not grow its loan book fast enough to generate the yield it wanted to see on this capital.

The bank, therefore, purchased a large amount (over $80 billion) in mortgage-backed securities (MBS) with these deposits for their hold-to-maturity (HTM) portfolio. Almost 97 per cent of these MBS were over 10 years in duration, with a weighted average yield of 1.56 per cent.

However, with the rise in US Fed interest rates, the value of SVB’s mortgage-backed securities (MBS) plummeted. This is because investors can now purchase long-duration “risk-free” bonds from the Fed at a 2.5x higher yield. Precisely, with the rising US Fed interest rates, the value of existing bonds with lower payouts fell in value.

Suman Bannerjee, CIO at US-based hedge fund Hedonova, said, “SVB is an iconic institution in the Bay Area with very deep relationships with venture capitalists. In 2020 and 2021, the bank’s deposit base rose by $90 billion. But a bank has to make money by lending.”

He added that SVB’s customer base is concentrated among California tech startups who are already flush with cash and do not need loans. Because of this, SVB invested some $88 billion in mortgage-backed bonds in 2021. As the Fed increased interest rates, the value of these bonds collapsed, eroding SVB’s capital base completely.

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