For those steeped in Silicon Valley lore, Silicon Valley Bank (SVB) was a foundational player in the start-up world and a pillar of the Valley’s venture community. When I was an attorney at Wilson, Sonsini, Goodrich, & Rosati, we would advise nearly every start-up to consider banking with SVB, as they understood the Silicon Valley ecosystem and the needs of its entrepreneurs.

So how and why did this storied bank with 40 years of steady growth suddenly go bankrupt in a span of 36 hours, and what will be the impact upon Silicon Valley and local real estate prices? My analysis and conclusion may be counterintuitive, but I project that the loss of SVB as well as First Republic Bank (FRB) will benefit the Silicon Valley real estate market in the short term, but may lessen housing appreciation in the long run.  

How Did This Happen?

SVB’s business model was based on lending to venture backed start-ups and then growing with them as they scaled upward. SVB was flush with cash from the tech boom that occurred in 2020 and 2021, and they put their extra funds into long-term bonds that provided higher yields than short-term bonds. When the boom ended and venture fundraising dropped late last year, the same VC firms and start-ups that were plowing money into SVB started taking their deposits out, resulting in SVB getting concerned over their lack of capital.

While earning a master's degree at Stanford’s Graduate School of Business, I studied many models for purchasing bonds, but the key component SVB missed was not hedging the risk of bond returns rising and the value of their lower yielding bonds declining.  

At the close of the stock market on March 8, SVB announced that to raise funds to cover these capital outflows, they sold over $20 billion in bonds and lost nearly $2 billion in value due to not hedging against the risk of higher rates. That same evening, Moody’s downgraded SVB’s stock and liquidity concerns started mounting. Many prominent venture capitalists advised their portfolio companies to withdraw their funds, resulting in a loss of $42 billion in deposits. The next morning, regulators shuttered SVB and fears abounded that the funds of VC firms and start-ups would be frozen. A few days later, the FDIC informed SVB depositors that none of their deposits, even amounts in excess of the FDIC limits, would be lost and they would have immediate access to their funds.

Many regional banks soon had a run on their deposits due to the fear that they would be the next domino to fall. FRB has been hardest hit due to having some of the same qualities as SVB. Even though they had different business models, both banks had prosperous clients, which went from being a positive to a negative. After all, these clients are the ones most concerned about a bank run since the FDIC guaranteed deposit protection is only up to $250,000 per person, and $500,000 per couple, per bank. 

With the fear of FRB instability, perception became reality, and even a $30 billion dollar infusion by some of the nation’s largest banks to FRB could not stem the over $70 billion in customer deposits that were lost over the next week. Just as this issue of The DeLeon Insight went to print, in fact, FRB's assets and deposits were seized by federal regulators and sold to JP Morgan Chase Bank. 

Short-Term Impact 

Paradoxically, this turmoil in the banking system should actually improve the market for the vast majority of homes priced below $20 million. With the economic uncertainty caused by SVB imploding and other banks being at risk, the Federal Reserve now has to be more circumspect about increasing interest rates further, as the pain of these increases and its impact on bond prices is what indirectly led to SVB’s and FRB's collapse.  

Before the banking crisis, most analysts predicted the Fed would increase rates by two more quarter-point increments; now, most analysts see only one more quarter point increase. Additionally, mortgage rates, which are largely driven by the bond markets and not the Federal Reserve, saw large decreases. Mortgage rates from Wells Fargo and other large lenders have dropped by nearly half a point, with some rates now being below 5%, and many analysts are now predicting a much stronger spring selling season due to this unexpected drop. I, personally, am seeing a stronger market with many homes getting multiple offers and selling above list price, sometimes by more than $500,000.  

Affluent buyers who do want, or need, a mortgage will be hardest hit by the SVB/FRB bank meltdown.  These individuals are often the ones with much of their income coming from non-traditional sources, such as Restricted Stock Units ("RSUs"), options, and inconsistent large bonuses. My experience has been that over half of these buyers would be pre-approved with either FRB or SVB. 
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‍Long-Term Impact

SVB was a small player in the mortgage world, but a foundational player in facilitating start-ups through providing liquidity when no other bank would. I have concerns that the Silicon Valley ecosystem will have a vacuum to fill if another entity does not replace the pivotal role SVB played for start-ups. With SVB being acquired by North Carolina-based First Citizens Bank, I doubt it will provide start-ups with its former flexibility in underwriting. If this void is not filled, VC firms will have to better capitalize their start-ups more, allowing for less leverage and consequently fewer start-ups being able to obtain funding. I hope that a savvy Valley person such as Marc Andreessen steps in to create a SVB replacement, for I feel that much of Silicon Valley’s competitive advantage is that all start-up advisors such as SVB played a unique role in helping these companies succeed, and their loss is a loss for Silicon Valley. Another possibility is that one or more of the large private banks (or divisions) will develop products focused on the needs of the Silicon Valley elite. 

And while my clients will enjoy the lower rates that have resulted from this banking crisis, my hope is that we find an alternative to fill SVB’s role in the Silicon Valley ecosystem so the long-term ramifications aren’t as bad as many fear.