The SVB Incident: The Second Biggest Bank Failure in US History
How a $212 Billion Bank Imploded Overnight
J. C. Lai
Founded in 1983, Silicon Valley Bank was the 16th largest American bank, managing US$209 billion in total assets at the end of 2022. It specialised in providing financing for start-ups and venture-backed firms within the tech and healthcare industry, including big-names such as Roku and Roblox.
The onset of the COVID pandemic saw a period of rapid growth for the bank, as a combination of higher corporate saving ratios and lower risk sentiment drove many firms to deposit more in banks. Between 2019 and 2021, SVB deposits tripled to US$189 billion, which saw their emergence from the 34th largest bank in America to within the top 20s.
The excess cash generated from this sudden and rapid growth were mostly invested into long term US treasuries and government backed mortgage securities, with SVB’s securities portfolio rising about US 100 billion dollars between 2020-2022. Such securities are traditionally considered to be safe, if not the safest form of investment, as it is backed by the U.S. government, meaning that unless the government collapses or undergoes severe turmoil, the likelihood of the debt to be repaid is high.
Around the same time as when these bond purchases occurred, however, the American economy re-opened from the pandemic and a strong rebound of domestic demand, coupled with supply side shortages linked to supply chain disruptions from COVID and the Russian-Ukraine war, led to soaring inflation rates, rising from 1.2% in 2020 to a 9.1% peak in June 2022. This called for a contractionary monetary policy stance by the federal reserve in order to tame inflation, leading to a rise in the Federal Funds Rate from 0-0.25% in March 2020 to 4.5-4.75% today.
Rises in the Federal Funds Rate has an inverse effect on the value of bonds, as newly issued bonds pay higher amounts of interest compared to pre-existing ones, decreasing the demand and hence the market value of these older bonds. This usually does not pose a problem to major banks, since as long as bonds are held to maturity, the market value does not affect the book-value of the original investment which the government is subject to repay upon maturity.
However, an unanticipated USD 30 billion dollars fall in deposits from the collapse of the tech boom from November 2021 forced SVB to sell some of their bonds and take on the loss in order to fund these withdrawals. In a regulatory filing on March 8, 2023, SVB announced that it sold US 20 billion dollars of securities and took a loss of around US 1.8 billion dollars to mitigate the decline in deposits, and plans on selling US 2.25 billion dollars in new shares to raise capital.
This had two immediate impacts which led to the bank’s ultimate demise.
Following the regulatory filing, SVB investors fled the company and the share price crashed at the market opening. A business that was originally valued at US 44 billion dollars on the stock exchange 18 months earlier fell to below US 7 billion dollars, effectively destroying the company.
Furthermore, a bank run followed the stock sell-off, where start-ups and other tech companies withdrew their cash from SVB due to fears of the bank’s stability. Within one day, US 42 billion dollars were withdrawn in deposits, which amounts to around 1 million dollars a second.
The following day marked the end of SVB, when regulators seized control of the bank. The FDIC announced that all deposits, including accounts which were uninsured (>US$250,000) would be covered, allowing customers to recover all funds and to prevent financial contagion to the economy.
Many have blamed the SVB’s failure to the Trump administration’s roll back of Obama’s 2010 Dodd-Frank Act, which ensured that major banks like SVB would face stricter regulations. The collapse of SVB reveals the persisting vulnerability of banks following the GFC, showing how further regulation is needed to protect the stability of banks and the money of its customers.