Mar 11, 2023

EconExtra: Silicon Valley Bank—A Traditional Bank Run but not a Traditional Bank Failure

We just added a Virtual PD for Wednesday, March 15th at 4pm PT: Understanding the Silicon Valley Bank Crisis and Its Aftermath. Register here. 


The Silicon Valley Bank collapse has dominated headlines since midday yesterday. What follows is a distillation of several articles covering different angles, breaking it down into a few key points. In the end, it is a pretty simple story.


A classic bank run brought the demise of the Silicon Valley Bank, but SVB was anything but a traditional bank in many regards. It was a bank for start-ups. It grew significantly in recent years, during a time of very low interest rates, and serving clientele with non-traditional needs. This was the first bank failure since Washington Mutual failed in 2008, and the second largest in US history. SVB failed not because of poor quality assets (sub-prime mortgages brought down Washington Mutual) but because of a huge mismatch of both timing/duration and interest rates between its assets and its liabilities.



Silicon Valley Bank served tech startups started forty years ago. These companies deposited massive amounts of cash raised through IPOs, SPACs, from venture capitalists, and other types of equity funding, and subsequently ran their businesses with that cash. 

Usually banks take deposits and make loans with the money. But SVB’s clients did not need loans. They were flush with cash. There were surely a few CEOs who might have needed mortgages, and a few more traditional businesses in the area (vineyards) that might have needed traditional loans, but there was not nearly enough demand for loans to absorb the deposits. So what did SVB do with all of that cash? It bought long-term government securities and mortgage backed securities—at low (fixed) interest rates. In fact, 56% of their assets were in these instruments, compared to 25-28% for major banks, according to Robert Armstrong of the Financial Times.   They had $74 billion in loans and $120 billion of investment securities at the end of 2022.


The Role of Interest Rates

Interest rates are a big part of this story. For one thing, several years of low interest rates and low inflation were optimal conditions for start-ups to raise equity. This is why SVB grew so quickly in recent years. However, in recent months, with both higher interest rates and higher inflation, investors have been more circumspect about forking over more cash.

In terms of the mechanics of banks, deposits are short-term liabilities that for years of low interest rates, paid little to no interest. We mentioned that deposits are usually then loaned out at varying terms, but usually longer term than deposits, and at higher and often variable interest rates to compensate for the credit risk the bank is taking. When SVB could not make sufficient loans, it purchased long-term, low, fixed-rate securities. As inflation and interest rates rise, depositors may be looking for some interest on their deposits, but more importantly, SVB was pretty much locked into these long-term, low-interest securities that were losing value. SVB had significant interest rate risk and were on the wrong side of that bet. (Remember that inverse relationship between interest rates and bond prices.) Liquidating them, which they eventually had to do, cost them dearly.

The Unraveling

It only took 48 hours for SVB to go from a well capitalized, functioning bank to extinction. It started with an announcement on Wednesday that they were raising $2.25 billion through a sale of their equity to shore up its balance sheet after they lost $1.8 billion from selling $21 billion of bonds from their portfolio. We mentioned that the higher interest rates pretty much stopped the inflow of additional deposits for these startups, but the startups continued to withdraw funds to run their businesses. This announcement triggered panic, and its customers withdrew a total of $42 billion by Thursday night. At that point, SVB had a negative cash balance of close to $1 billion, and could not scrounge up enough to cover it. They couldn’t sell shares, and buyers evaporated as deposits flew out of accounts. And so the doors were locked, and customers could no longer access their funds.


As the dust settles, blame is being cast in several directions (Venture capitalists for the panic, the Fed for higher interest rates for starters.) We will see how this story ends up being written for the history books.


So what happens to SVB’s depositors? Corporate customers have the same FDIC protection as individuals--$250,000 each. Beginning Monday, SVB offices will reopen to distribute those funds. Balances beyond $250,000 will have to wait until the bank’s assets are liquidated or some other arrangement has been made. A whopping 89% of the deposits were uninsured. It is not clear yet how the startups whose funds are now unavailable will be able to survive. I’m sure there will be another chapter or two of this story to write.




There are numerous good resources available. The ones listed below were the basis of this article.

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.

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