SVB discussed selling up to $20bn in bonds months before bank run

Silicon Valley Bank discussed selling a chunk of its bond portfolio at a loss as early as last November, according to newly released documents that show executives grappling with a liquidity crisis at the lender months before it succumbed to a historic bank run.

In an internal presentation codenamed “Project Phoenix”, SVB executives debated selling up to $20bn worth of bonds at a $2bn loss, while warning that there was “no silver bullet” to solve the increasingly urgent problem of deposit outflows that were projected to continue.

“Investor reaction is expected to be very negative,” the November board presentation said, with the last two words in bold and underlined.

That warning proved apposite. A day after the bank launched a version of the plan in March, shares in SVB Financial fell by 60 per cent. Regulators seized the bank the next day, and its parent company declared bankruptcy.

Internal SVB discussion documents, dated November 8, were released by the Federal Reserve on Friday as part of the central bank’s review of its handling of the second-biggest bank failure in US history.

“While we do not plan to move forward at this time,” the presentation stated, “these are options that we can consider should current market conditions persist”.

The plan, if enacted, would have marked the second time in just nine months the bank had decided to reverse its interest rate hedging strategy.

At the beginning of 2022, SVB owned interest rate hedges intended to offset the losses on its bond portfolio if interest rates were to rise.

But in March that year, SVB was so confident of its financial position that it began shedding the hedges so as to maximise its gains in the event that a recession forced the Fed to pivot to cutting rates.

“Protecting profitability was the focus,” the Fed said in its report.

By November, falling tech valuations were causing venture capital firms to slow their investments and SVB’s clientele of cash-burning start-ups were withdrawing deposits at an alarming rate.

As the bank’s stockpile of liquid assets ran low, SVB confronted the possibility that it might have to sell some of its long-dated bonds to meet those withdrawals. In an effort to limit the losses that would entail, the board considered buying hedges similar to those it had been selling in March.

To complete the manoeuvre, SVB would have had to hasten its adoption of a new accounting standard, the documents show.

According to the November board presentation, “a one-time transfer from our HTM [hold to maturity] to AFS [available for sale] portfolio . . . for purposes of hedging those securities in support of interest rate management” was among the options considered.

The November discussion took place one month before SVB chief executive Greg Becker told the Financial Times that an early sale of the HTM portfolio was off the table.

“We have no intention of using it or selling it as we can borrow against it,” Becker told the FT in December.

Instead he floated using some of the bank’s $91bn worth of “off balance sheet assets” to prop up its finances. “We have lots of flexibility but it would only be needed if we saw net deposit outflows,” he said. “I don’t think that is a likely scenario.”