What happened to Silicon Valley Bank? The short answer is, it failed after a classic bank run during which depositors rushed to withdraw cash while they still could.
The longer answer is quite the read. Though it ranked among the 20 largest banks in the United States when it failed, Silicon Valley Bank had an unusual business model that disproportionately focused on the U.S. tech and venture capital industries. This worked out great for a while, but as the tech economy began to crack in 2022, SVB came under unprecedented stress.
In the end, SVB couldn’t overcome the tight-knit venture capital community’s concerns about its solvency. In-the-know depositors’ low-key shuffle toward the exits turned into a disorderly death spiral.
Here’s the full story (so far) of what happened to Silicon Valley Bank and what it means for the financial industry as a whole.
What Happened to Silicon Valley Bank?
Silicon Valley Bank collapsed on March 10, 2023. California regulators seized the bank’s assets and transferred them to the FDIC, which rushed to find a buyer. On March 12, the FDIC took the unusual step of publicly announcing that it would guarantee all SVB deposits, including those in accounts larger than the customary $250,000 deposit insurance limit.
During the first week of March 2023, SVB’s increasingly frantic response to concerns about its financial health culminated with a fire sale of low-yield government securities that had significantly declined in value due to rapid increases in prevailing interest rates. That sale resulted in a nearly $2 billion loss and destroyed what little faith remained among the bank’s customers. To head off the potential for financial “contagion” to spread to seemingly healthy banks — always a possibility when a big bank fails — state and federal regulators felt they had no choice but to step in.
Silicon Valley Bank was the biggest U.S.-based bank to fail since the global financial crisis of the late 2000s and the second biggest U.S. bank failure of all time, not adjusting for inflation.
Timeline of Silicon Valley Bank’s Collapse
Here’s a high-level timeline of Silicon Valley Bank’s history, distress, and eventual failure, followed by more detail on key events along the way.
SVB Goes All In on Tech
Silicon Valley Bank was founded in 1983, at the dawn of the personal computing revolution. From the outset, it positioned itself as a disruptive force that, unlike its more buttoned-up competitors, understood the needs of tech entrepreneurs and investors.
The pitch worked. By the 2000s, SVB had become the bank of choice for the venture capital funds fueling early-stage tech companies. It counted some 2,500 venture capital and private equity funds as customers in the months leading up to its collapse, according to its website. Other counts claimed some 6,000 funds, though what exactly constitutes an independent fund isn’t always clear.
Regardless, these well-capitalized investment funds had tremendous leverage over their own customers, the privately held tech companies (“portfolio companies”) that depended on them for working capital. Because SVB was the funds’ bank of choice, their deal terms often required their portfolio companies to bank with SVB as well.
By one count, 50% of all U.S. startups had SVB banking relationships. Many startup employees did their personal banking with SVB too, turning to the bank for checking and savings accounts and mortgages and credit cards and all the rest.
This worked out amazingly well for SVB and its venture capital and private equity cash cows during the long tech boom of the 2010s and early 2020s. So well, in fact, that neither side saw the need to diversify — to other industries in SVB’s case or to other banks in depositors’ case. This broke a cardinal rule of risk management, which people who manage money for a living are supposed to know something about.
SVB Deposit Clients Withdraw Cash to Stay Afloat
SVB’s disproportionate focus on a single industry left it uniquely vulnerable if and when that industry hit the skids.
That’s exactly what happened in 2022. Beginning in March 2022, the Federal Reserve hiked its benchmark federal funds rate from near zero to 4% in less than 12 months’ time. Though necessary to protect consumers (and the broader economy) from the ravages of runaway inflation, the rapid hiking pace shocked a tech economy that had grown accustomed to cheap capital. Many unprofitable tech companies weren’t built for a 4% interest rate environment, let alone a 6% interest rate environment (where many prognosticators expected the Fed to end up before SVB failed).
From startups you’ve never heard of to giants like Meta and Alphabet, tech companies laid off 160,000 workers in 2022 and tens of thousands more in Q1 2023. These layoffs highlighted the intense financial pressure tech companies faced during this period. Even as they lightened payrolls, startups and venture capitalists were quietly draining their cash reserves to fund their operations. Which meant SVB, as the tech industry’s bank of choice, was quietly draining its own reserves to make good on those withdrawal requests.
SVB Makes a Terrible Bet on Bonds
The tech downturn and the withdrawal requests that followed probably would not have been an existential problem for Silicon Valley Bank. After all, SVB had weathered the dot-com bust and the pre-global financial crisis housing crisis, both of which hit California hard.
But this time around, SVB was much bigger, and it needed to invest tens of billions of dollars in new deposits somewhere. That led to some questionable decisions that left its balance sheet in rough shape.
The biggest problem that we know about so far was a disastrous bet on low-interest, long-dated mortgage-backed bonds.
The bonds themselves were fine. Unlike banks that loaded up on junky mortgage-backed bonds in the mid-to-late-2000s, SVB played it safe and bought high-quality “agency” securities guaranteed by the federal government.
The problem was that the mortgages they were built on had super-low interest rates, an artifact of the same near-zero rate environment that buoyed SVB during the tech boom. When interest rates skyrocketed in the second half of 2022, SVB’s mortgage-backed security holdings declined in value.
In normal times, SVB maybe could have waited 5 or 10 years for these bonds to mature and not really suffered any ill effects. Interest rates would likely have declined during that time anyway, boosting the bonds’ value again.
But once its customers began draining their bank accounts, SVB didn’t have the luxury of waiting. By early 2023, SVB’s deposit base had eroded to the point that it needed to raise cash. Which meant it had to sell some of those devalued bonds at a steep loss — about $2 billion on a $20 billion sale.
SVB Rumors Spread, Then Panic
Plugged-in investors had been whispering for weeks about Silicon Valley Bank’s troubles before news broke of the distressed bond sale. Meanwhile, crypto investors and crypto-focused fintechs were quietly withdrawing cash from Silvergate Bank, a smaller bank whose exposure to the crypto sector mirrored SVB’s exposure to the broader tech sector.
The dam broke on March 8, when Silvergate announced it would voluntarily liquidate its assets and close shop. Vague concern about SVB’s financial health turned to full-blown panic, and prominent venture capital funds urged portfolio companies to pull their deposits.
On March 9, SVB announced its intention to raise $2.25 billion in a secondary share sale — apparent confirmation that the bank was in serious trouble. Depositors stampeded for the exits, pulling some $42 billion before the bank stopped processing withdrawals. SVB’s stock lost more than half its value overnight, destroying the rationale for a share sale. By the morning of March 10, SVB was desperately searching for a buyer, but it was too late.
The FDIC Takes Over Silicon Valley Bank
The FDIC officially put SVB into receivership around midday Eastern Time on Friday, March 10. Customer reports suggest SVB stopped processing outbound wire transfers sometime between the close of business on March 9 and the start of business on March 10, leaving a giant question mark over the fate of tens of billions in uninsured deposits.
The FDIC worked frantically over the weekend to find a buyer for SVB. When none emerged, regulators turned to Plan B: backstop uninsured deposits and prevent the panic from spreading to other
SVB Depositors Are Made Whole, but Not Shareholders or Bondholders
On the afternoon of March 12, the FDIC announced an interim resolution. It would make all SVB depositors whole, including those with more than $250,000 in the bank, but not the bank’s equity shareholders and bondholders. At best, they’d get pennies on the dollar when the dust settled.
This resolution deviated from the FDIC’s usual practice of insuring only the first $250,000 in each customer’s account. It invoked the “systemic risk exception” as justification, the thinking being that wiping out tens of billions in deposits would lead to a broader banking crisis. Bank customers were already on edge, and many big regional banks had similar client diversification and balance sheet issues, leaving them vulnerable to runs. If SVB could go from outwardly fine to insolvent in less than 72 hours, so could First Republic or PacWest.
Could Silicon Valley Bank Have Avoided Collapse?
The flaws in SVB’s business model were apparent to anyone who cared to look. They were coded into the bank’s DNA — into its very name. Had leadership made different decisions at four key inflection points, they might still have jobs today.
|Mistake||Why It Mattered|
|Lack of diversification||SVB put basically all its chips in the “tech” pile. This worked really well until interest rates spiked and the tech bubble burst.|
|Lobbying for deregulation||SVB and other big-ish banks lobbied hard for deregulation (and got it) in 2018. Banks hate regulation, but SVB would probably still be around if this effort had failed.|
|Ignoring interest rate risk||SVB doubled down on low-yield, long-duration bonds at the worst possible time, leaving it vulnerable to rising interest rates.|
|Getting too cozy with venture capitalists||SVB compounded its outsize tech exposure by participating in funding deals.|
Overwhelming Focus on One Industry (Lack of Diversification)
Silicon Valley Bank lived up to its name for decades as the funding source of choice for the biggest names in tech and venture capital.
Silicon Valley Bank’s fortunes really took off in the 2010s, as a prolonged period of historically low interest rates fueled an investment boom in high-growth startups. In hindsight, SVB should have used the period from about 2012 (when the boom really began in earnest) to 2021 (when it peaked) to develop a diversification strategy that would leave it less exposed to the inevitable bust.
The untold millions in profits generated during these years could have funded aggressive customer acquisition campaigns and geographic expansions and other costly but necessary moves to develop a customer base that looked more like America as a whole. Instead, SVB took what seemed like the easier path. In the end, it wasn’t.
Aggressive Lobbying for Deregulation After the Global Financial Crisis
In 2018, Silicon Valley Bank and a number of other big regional banks aggressively lobbied Congress to weaken the Dodd-Frank Act.
Their efforts paid off in a bipartisan law that raised the “too big to fail” threshold — and the increased regulatory scrutiny that comes with it — from $50 billion in assets to $250 billion in assets. SVB had about $198 billion in assets when it failed, comfortably below the cutoff.
It’s not certain that SVB would have survived had it still been classified as “too big to fail,” but the bank probably would have managed its assets and liabilities more carefully.
Stubborn “Fight the Fed” Mentality
Silicon Valley Bank was ultimately undone by its decision to keep low-yield, long-dated securities on its balance sheet amid rapidly rising interest rates.
That decision seems inexplicable in hindsight. It was inexplicable in real time too. You didn’t have to be a finance expert to know by early 2022 that the Fed was going to raise interest rates aggressively in a belated bid to stamp out inflation. You just had to pay attention to the news.
So the people at SVB responsible for this call either weren’t paying attention to the news, didn’t believe it, or didn’t care. We might never know. But it’s clear that SVB could have avoided its fatal bond sale had it taken better care of its balance sheet in 2022, when there was still time to swap out longer-dated securities for shorter-term, higher-yield alternatives.
Codependent Relationship With Venture Capitalists
Silicon Valley Bank’s overly chummy, even codependent relationship with tech investors compounded its poor diversification strategy.
One well documented example was the fact that many investors required their portfolio companies to keep their money with SVB. This requirement was baked into funding terms, meaning companies that ignored it risked default. It’s not clear that SVB actively encouraged this practice, but it certainly didn’t discourage it, and it worked out well during the boom. SVB’s deposits nearly doubled in 2021 alone.
Less well known was SVB’s frequent participation in startup funding deals. Some of these bets paid off handsomely. SVB made millions on FitBit’s and Coinbase’s respective IPOs, for example. They also increased SVB’s entanglement with and dependence on the notoriously volatile tech economy.
Maybe it’s unfair to ask a bank to voluntarily pass on opportunities to grow their deposits or profit from their customers’ success. But had Silicon Valley Bank followed a more conventional business model, it would have been less exposed when the party stopped.
Silicon Valley Bank Failure FAQs
Like so many tech startups, Silicon Valley Bank failed fast, leaving many questions unanswered. Fortunately, we do already know the answers to some pressing questions about what happened (and what happens next).
Does Silicon Valley Bank Still Exist?
No, Silicon Valley Bank is no more. When the FDIC put it into receivership, it created a new entity called Silicon Valley Bridge Bank.
This successor bank holds the “old” Silicon Valley Bank’s assets and liabilities. The FDIC will try to find a buyer for all this stuff as soon as possible. In the meantime, it’s more or less business as usual for SVB customers who didn’t pull all their money and close their accounts during the run.
What Will Happen to Silicon Valley Bank Customers’ Money?
The FDIC says it will guarantee all Silicon Valley Bank deposits, including those beyond the current statutory deposit insurance limit of $250,000.
This is crucial because the vast majority of SVB’s deposit accounts had more than $250,000 in them. For the most part, its individual customers were wealthy investors and entrepreneurs. Its business customers were well-funded startups and the venture capital funds behind them.
For such people and companies, $250,000 isn’t much. When it first became apparent that SVB was in trouble, there was a real concern among its customers that they’d lose almost everything if the bank failed. This no doubt contributed to the run on deposits and could well have become a self-fulfilling prophecy. That is, had SVB customers known from the start that the feds would make them whole no matter what, they might not have stampeded for the exits so fast.
What Will Happen to Silicon Valley Bank’s Shareholders?
They’ll be wiped out, more or less. Financial regulators halted trading in SVB shares on the morning of March 10, ahead of the FDIC’s receivership announcement. Trading hasn’t resumed and likely never will.
Furthermore, in its announcement that it would make all depositors whole, the FDIC also made clear that there would be no bailout for SVB shareholders or bondholders. Any SVB assets of value will eventually find their way to other banks, but SVB itself is insolvent and has no market value.
Are Taxpayers on the Hook for Silicon Valley Bank’s Money?
Not directly. Banks themselves pay into the FDIC’s deposit insurance fund, sort of like employers pay into state unemployment insurance funds.
That’s not to say this debacle won’t be expensive. To cover what’s likely to be many billions in insurance payouts due to SVB’s failure, the FDIC may do what’s known as a special assessment on member banks. That last happened during the global financial crisis, and banks won’t like it, but it’s the price they pay for a (mostly) smooth-functioning financial system.
Will Other Banks Fail Because of Silicon Valley Bank?
It’s not clear how closely the two episodes are related, but New York-based Signature Bank failed just after Silicon Valley Bank. The timing was such that the FDIC revealed Signature’s receivership in the same announcement outlining its initial plan for SVB’s deposits. As with SVB, the FDIC promised to make all Signature depositors whole.
Are SVB and Signature canaries in the coal mine? It’s early days, but probably not. Signature had disproportionate crypto exposure and (apparently) some of the same systemic issues as SVB, so its problems may not translate to the wider banking industry. Then again, it’s always concerning when a bank with more than $100 billion in assets fails — let alone two in less than 48 hours.
Will Tech Industry Layoffs Increase Because of Silicon Valley Bank?
Probably, but the fallout isn’t likely to be as catastrophic as first feared.
Before the FDIC announced it would guarantee all SVB deposits, tech employers and funders were consumed by worries that they’d be unable to make payroll. That would have resulted in a sharp, sudden contraction in tech sector employment as startups raced to protect their balance sheets. Many cash-burning startups would likely have shuttered altogether.
As it stands, the FDIC’s liquidity guarantee restores the tech sector’s grim-but-not-dire status quo.
Final Word: Is Silicon Valley Bank Like 2008 All Over Again?
Probably not. Financial crises are by nature unpredictable, so there’s certainly a chance SVB’s failure could precipitate something on the order of 2008, but it’s unlikely for a variety of reasons:
- Late-2010s deregulation aside, bank regulation remains tighter than before the global financial crisis.
- Banks’ balance sheets are stronger than before the global financial crisis.
- Banks’ lending standards are tighter than before the global financial crisis, which means there’s less worthless debt floating around the financial system.
- SVB focused on only one real economic niche, as did Signature Bank — whereas most other banks have more diverse customer bases.
- SVB made a spectacularly bad bet on long-dated, low-yield bonds — one that was easy to spot in hindsight and which draws its now-former executive team’s competence into question.
- Despite volatile energy markets, persistent inflation, an unusually strong dollar, and other headwinds, the global economy appears to be in a stronger position than immediately before the global financial crisis.
If you’re a committed pessimist, you can poke holes in these arguments. But a fair reading of the situation is that SVB’s troubles were, if not unique, then at least unusual.
#Silicon #Valley #Bank #SVB #Collapse #Largest #AllTime #Failure