On March 10, 2023, Silicon Valley Bank (SVB) collapsed following a rapid bank run, making it the third-largest bank failure in U.S. history.
The SVB failure was part of a broader banking crisis in March 2023, alongside the failures of Silvergate Bank and Signature Bank.
SVB’s troubles began when the bank invested heavily in long-term securities, seeking higher returns from its growing deposits.
These investments were accounted for on a hold-to-maturity basis, leaving the bank vulnerable as the market value of these bonds plummeted.
The Federal Reserve’s interest rate hikes to combat inflation further decreased the value of SVB’s bond portfolio, leading to significant unrealized losses.
As interest rates rose, SVB clients began withdrawing their funds to cover increased borrowing costs and liquidity needs.
On March 8, 2023, SVB announced the sale of over $21 billion in securities and a plan to raise $2.25 billion through an emergency sale of treasury stock.
This announcement triggered panic among customers, leading to a bank run with $42 billion withdrawn by the next day.
By the morning of March 10, the California Department of Financial Protection and Innovation had seized SVB and placed it under the FDIC’s receivership.
SVB had about $172 billion in deposit liabilities, 89% of which exceeded the FDIC’s insurance limit.
The FDIC intervened, guaranteeing that all depositors would have full access to their funds by the next business day.
The FDIC reopened the bank as Silicon Valley Bridge Bank, N.A., to facilitate an orderly sale of SVB’s assets.
The government response was criticized by some as a bailout, but it focused on protecting depositors, not the bank’s management or shareholders.
SVB’s collapse had far-reaching effects, particularly on startup companies, which were temporarily unable to access their funds.
The bank was a major player in financing venture-backed companies, with clients including Airbnb, Cisco, and Pinterest.
SVB’s collapse also impacted sectors beyond technology, affecting media companies, wineries, and more.
At the time of its failure, SVB was the 16th largest bank in the U.S., with $209 billion in assets and $175.5 billion in deposits.
The bank’s rapid growth during the COVID-19 pandemic led to a surge in deposits, which were invested in long-term Treasury bonds.
These long-term bonds lost value as interest rates rose, creating a liquidity crisis for SVB.
SVB’s risk management was criticized for failing to hedge against interest rate risk on its held-to-maturity portfolio.
The bank’s chief risk officer resigned in April 2022, and a successor was not named until January 2023, exacerbating the situation.
By the end of 2022, SVB’s bond portfolio included $117 billion in securities, with unrealized losses exceeding $15 billion.
SVB’s attempts to raise cash by selling securities led to a $1.8 billion loss, worsening its financial condition.
Some experts blamed the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) for weakening regulatory oversight of banks like SVB.
A Federal Reserve review in 2021 had already flagged deficiencies in SVB’s risk management, which were not adequately addressed.
In the days leading up to the collapse, major investors urged their portfolio companies to withdraw their funds, exacerbating the bank run.
By the end of the bank run, SVB had a negative cash balance of $958 million, forcing the FDIC to step in.
The failure of SVB sparked concerns about the stability of other regional banks, with attention turning to First Republic Bank and Western Alliance.
The FDIC, along with other agencies, took emergency measures to protect depositors at SVB and Signature Bank without using taxpayer money.
On March 13, the FDIC transferred SVB’s assets to a bridge bank and appointed a new CEO to stabilize the situation.
The collapse of SVB has led to ongoing discussions about the need for stronger regulatory oversight and the potential risks in the banking sector.
