07.11.2023 Lexology

Silicon Valley Bank: What is ESG without the "G"? An introduction to the Silicon Valley Bank

Pedro Capitão Barbosa, Sofia Araújo Matias and Inês Meneses Lampreia wrote the opinion piece "Silicon Valley Bank: What is ESG without the "G"? An introduction to the Silicon Valley Bank", published in Lexology.

The lawyers talk about Silicon Valley Bank. Its genesis and its path as a banking institution.

«The Silicon Valley Bank (also known as SVB), the 16th largest bank in the United States, was a state-chartered commercial bank and a financial partner of the innovation economy. The bank saw major growth during and after the pandemic (between 2019 and 2022), when it nearly tripled in size, with assets of approximately $209 billion by December 2022. […]

Between 2019 and 2022, the Silicon Valley Bank experienced a substantial growth surge attributed to the technological boom. During this period, the bank’s tech customers raised a lot of capital from venture capitalists and private equity investors, resulting in an increase in the bank’s deposits and assets.

Following fundamental banking principles, these funds ought to be allocated towards loans and assets that yield a higher return than the cost of deposits. This approach helps maintain a healthy net interest margin, which is crucial for generating a net profit for the bank. Nevertheless, to achieve this end, it is required to have assets where the yield is higher than the cost of funds for the duration of the deposit.

Despite holding a (small) proportion of deposited funds as cash, most of the excess funds in the SVB were allocated towards the purchase of long-term debts and treasury bonds, as there was not enough demand for loans to use the cash. Typically, these assets offer low returns but also relatively minimal risk. Nonetheless, with the Federal Reserve raising interest rates in reaction to soaring inflation, the bank was locked into low-yielding investments when interest rates started to rise. […]».

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