The March 2023 collapse of Silicon Valley Bank shone a light on how a bank’s financial vulnerabilities, when left unaddressed, can lead to ruin. The bank, the 16th largest in the United States, was shuttered after rising interest rates caused its investmeꦐnts to plunge in value and depositors withdrew huge amounts of cash.

Management errors, investment missteps, market volatility, and regulatory changes all turned a financial success story into a 21st-century disaster. At the time, it was the largest bank failure since Washington Mutual closed its doors during the 2008 financial crisis.

Federal regulators took extraordinary steps to prevent a widespread financial contagion in the market, and subsequent regulatory measures have reduced the risk of similar bank failures in the future.

What Was Silicon Valley Bank?

Silicon Valley Bank (SVB) was a subsidiary of Silicon Valley Bank Financial Group (SVBFG), a bank holding company, financial holding company, and financial services company. Silicon Valley Bank was a state member bank of the 澳洲幸运5开奖号码历史查询:Federal Reserve System, which held the lion’s share of SVBFG♕’s assets.

SVBFG provided commercial and private banking services to the life science🀅s and technology sectors, including a substantial number of early stage startup companies and venture capital-backed firms. The financial group derived nearly all its revenue from American clients.

“By the first quarter of 2022, its total assets peak🌄ed at $218 billion, ranking it as the 16th largest bank in the United States,” said Dr. Lai Van Vo, associate professor of finance at Western Connecticut State University. He pointe♍d out that by 2023, SVB was on Forbes’ list of the world’s best banks, saying the publisher cited “its robust growth, strong credit quality, and profitability as evidence of its industry prominence and stability.”

History of Silicon Valley Bank

In 1983, Bill Biggerstaff and Robert Medearis founded Silicon Valley Bank in Santa Clara, California, after conceiving the idea while playing poker.  With CEO Roger Smith at the helm, SVB sought to provide banking services and credit to Silicon Valley-based tech startups. The first year, SVB held around $18 million.

Between 2019 and 2021, SVB experienced tremendous growth, and its parent company tripled in size due in part to low interest rates. Deposits increased substantially in 2021 as SVB clients got additional funding through acquisitions, 澳洲幸运5开奖号码历史查询:initial public offerings (IPO), secondary offerings, 澳洲幸运5开奖号码历史查询:special purpose acquisition company (SPAC) fundraising, and venture capital investments. By the end of 2021, the financial group’s assets had grown 271%, compared to 29% in the overall bankinꦍg industry.

Why Did Silicon Valley Bank Fail?

A major turning point for the bank was 2022, when the Federal Reserve hiked interest rates, squeezing growth throughout the technology sector. Although the financial group’s deposits decreased in 2022, it still reported record high total assets–nearly $212 billion–for the year. However, by the end of that year, around 94% of SVB’s deposits were uninsured, making them more vulnerable to a bank run.

During a two-day period in March ⭕2023, depositors' substantial withdrawals made Silicon Valley Bank insolvent. On March 10, 2023📖, federal regulators shut down its operations.

Investment Losses

The financial group invested a large percentage of its deposits in long-term bonds and moജrtgage-backed securities🐈 with a maturity of 10-plus years. “Substantial investments in debt securities in 2021, made during a period of low interest rates, triggered significant losses when rates spiked in 2022,” Vo said. “A depositor base heavily concentrated among interconnected venture capitalists heightened the risk of a bank run, especially as the bank’s performance weakened.”

As interest rates rose, the val♍ue of SVB’s bond portfolio fell. Whe❀n the financial group liquidated $21 billion in bond holdings, its losses came to light and sparked depositor withdrawals. 

Bank Run

Silicon Valley Bank clients continued to take their money out thr💞oughout the first quarter of 2023. Slow growth within the technology sector prompted the bank’s parent company to inform investors that it expected reduced growth and income for the fiscal year. Additionally, the financial group advised investors that it expected credit rating companies to downgrade its credit status. Customers took these announcements as signs SVB was severely distressed financially, and the withdrawals spiked dr☂amatically.

On March 9, 2023, SVB depositors withdrew $42 billion. Bank supervisors reported that they expected depositors to remove more than $100 billion by March 10. Since SVB was heavily invested in long-term securities with low interest rates, it did not have the capital or collateral to meet the outflows. On March 10, the California Department of Financial Protection and Innovation deemed SVB insolvent and appointed the 澳洲幸运5开奖号码历ܫ史查询:Federal Deposit Insurance Corporateion (FDIC) to oversee its assets and liabilities.

Regulatory Environment

Following the 2008 financial crisis, Congress passed the 澳洲幸运5开奖号码历史查询:Dodd-Frank Act. The law’s provisions sought to prevent financial institutions from engaging in the types of risky activities that created that catastrophe. The new law also required financial institutions that held $50 billion or more in consolidated assets to undergo annual Federal Reserve-supervised stress tests—and semiannual in-house 澳洲幸运5开奖号码历史查询:stress tests—to help identify risks that could threaten their solvency.

In 2018, Congress passed the Economic Growth, ꧙Regu𒉰latory Relief, and Consumer Protection Act, also called the Crapo bill after its author, Republican Senator Mike Crapo of Idaho.  It modified the Dodd-Frank Act and increased the $50 billion stress test threshold to $250 billion in consolidated assets. At the end of 2022, 🤪SVB reported total assets of $212 billion, placing its holdings below the newer stress test threꦐshold. 

“Inadequate risk management exacerbated these vulner♋abilities,” Vo said. “Ultimately, this mismanagement of assets and liabilities, compounded by weak corporate governance, led to the bank’s failure.”

Who Was to Blame?

In its April 28, 2023, press release, the 澳洲幸运5开奖号码历史查询:Federaꦫl Reserve’s Board of Governors concluded that&n💝bsp; Silicon Valley Bank fell into insolvency due to💝:

• Poor internal risk management
• Failure of the Federal Reserve to understand SVB’s vulnerabilities
• Failure of SVB supervisors to quickly address vulnerabilities when they were discovered
• Reduced standards and supervision created by the Crapo Act. 

The Federal Reserve also noted that the rapid spread of information through social media networks exacerbated the speed and severity of deposit outflows.

A Timeline of the Collapse

Over a period of months, market conditions increased SVB’s vulnerability, but its collapse occurred with𝓀in the course of just a few days:

• March 8, 2023: SVBFG announced a $1.8 billion loss on its bond holdings and informed investors that it projected lower-than-expected earnings for the fiscal year. The news quickly spread on social media networks, prompting uninsured depositors to withdraw their funds from SVB.
• March 9, 2023: SVB customers withdrew $42 billion from their accounts.
• March 10, 2023: The California Department of Financial Protection and Innovation shut down SVB and appointed the FDIC as receiver.
• March 12, 2023: The FDIC announced that it had granted insured depositors full access to their insured deposits, while issuing receivership certificates on uninsured funds.
• March 13, 2023: The FDIC reopened all 17 SVB branches, resuming banking activities under the administration of the Deposit Insurance National Bank of Santa Clara (DINB).
• March 26-27, 2023: Fir🐈st C🍃itizens Bank purchased SVB’s assets and liabilities. The deal included $110 billion in assets, $56 billion in deposits, and $72 billion in loans.

Impact on Depositors and Investors

The FDIC is an independent agency of the U.S. government. 澳洲幸运5开奖号码历史查询:FDIC insurance covers deposits up to $250,000 per depositor per bank for each account type when FDIC-insured banks fail. This protection covers principal deposits, plus 澳洲幸运5开奖号码历史查询:accrued interest. Let’s say you deposit $100,000 in an FDIC-insured bank and over time your money accrues $3,000 in interest. If the ꧅bank fails, FDIC insur🃏ance will cover the entire $103,000 loss.

The majority of SVB deposits exceeded the FDIC coverage limit. Typically, the FDIC would not cover losses over the $250,000 threshold. But in the SVB case, the FDIC did, by applying the 澳洲幸运5开奖号码历史查询:systemic risk exception, which applies when losses due to failure could seriously imp𒀰act the financial stability of the overall market. 

Applying the systemic risk exception requires the approval of two-thirds of FDIC board members, the Treasury Secretary, and the president of the United States. Prior to the SVB 💜failure, the FDIC had appliಌed the systemic risk exception five times after 1991, all during the 2008-2009 financial crisis.

“[More than] 90% of SVB’s $175 billion 🎉in deposits exceeded the FDIC’s $250,000 insurance limit, leaving most funds uninsured and at risk in a typical failure,” Vo said. “This posed a severe threat to depositors, particular🤡ly tech firms dependent on these accounts.” 

He noted that SVB’s collapse, given its positio🔴n as the 16th🔯 largest bank in the U.S., “threatened systemic stability and risked contagion to other regional banks.”

But the systemic risk exception only applied to depositor funds. The FDIC did not cover losses suffered by investors and shareholders. “SVB’s stock plummeted after the March 8 announcement, dropping 60% on March 9 and halting trading on March 10 as the bank failed,” Vo said. “After its closure, shares beꦑcame effectively worthless, wiping out equityꩲ investors.” 

First Citizens’ acquisition of SVB’s assets and liabilities did not includ𒅌e equity stakes, so shareholders received no recovery.

Who Paid for the Rescue?

U.S. taxpayers did not directly fund Silicon Valley Bank depositor losses. According to the Federal Reserve, the bank’s failure cost the 澳洲幸运5开奖号码历史查询:Deposit Insurance Fund around $16.1 billion. The FDIC manages the Deposit Insurance Fund, which is funded through assessments on FDIC-i💛nsured banks. Banks pay assessments based on their insured deposits and their total liabilities.

Impact on the Banking Industry 

Banks use depositor money to make loans and invest in securities, typically long-term investments. Federal banking laws require banks to retain a portion of their deposits to cover customer withdrawals. But when a bank r♒un occurs, deposi﷽tors may seek to withdraw more money than is available.

Prompted by the SVB failure, the Federal Reserve established the $25 billion 澳洲幸运5开奖号码历史查询:Bank Term Funding Program, which provides loans to financial institutions when they are unable to meet their depositor withdrawal demands. The loan terms extend for up to one year and require qualified collateral such as U.S. agency mortgage-backed securities or U.S. 澳洲幸运5开奖号码历史查询:Treasuries.

While the funding program can ser𝔍ve as a stopgap for future bank failures, Vo noted that the SVB collapse impacted the banking industry in several ways. “Regional bank stocks plummeted,“ he said. Customers fled smaller banks for big players such as JPMorgan and Wells Fargo. “Mid-sized banks faced higher funding costs and deposit rate hikes to retain customers.”

Other Bank Failures

While the FDIC’s actions helped prevent widespread 澳洲幸运5开奖号码历史查询:financial contagion, the SVB failure did prompt bank runs that rendered two other banks insolvent. “Social media and digital banking accelerated deposit withdrawals, spꦓreading panic across regional banks fast,” Vo said.

On March 12, 2023, the New York State Department of Financial Services closed 澳洲幸运5开奖号码历史查询:Signature Bank after it failed to meet its depositor obligations. Again, the FD🃏IC declared a systemic risk exception to cover uninsured Signature deposits. The SVB and Signature collapses resulted in combined losses of approximately $22.5 billion, $19.2 billion of which was attributed to systemic risk exception payouts.

Depositor panic initiated by the SVB and Signature failures prompted a run on First Republic Bank of San Francisco, too, causing it to collapse in May 2023. Once again, federal regulators found that First Republic had grown rapidly and over-relied on uninsured deposits.

What Happens t♑o Your Money If Your Bank Collapses?

Bank failures—particularly those involving large financial institutions—do not occur often. When they do, the FDIC steps in to protect insured depositors. The FDIC insure♎s deposits up to $250,000. Typically, the FDIC will not cover funds that exceed this threshold except when it declares a systemic ris🅘k exception.

So, if a customer deposits $300,000 in an FDIC-insured bank, the Deposit Insurance Fund will only cover $250,000. However, the FDIC will issue depositors a receiver’s certificate, which provides proof of a claim against the bank. After the bank’s assets are liqui🗹dated, the claimant may recoup some or all of their remaining uninsured deposits.

The Bottom Line

The collapse of Silicon Valley Bank highlights how quickly a seemingly stable financial institut꧑ion can fail. In its review of the collapse, the Federal Reserve noted that SVB’s managers did not manage risks and did not act swiftly when vulnerabilities aro🦩se. The bank relied on uninsured deposits and invested heavily in long-term securities. The rapid spread of information on social media also played a significant role in the speed and severity of the SVB failure.

The FDIC’s systemic risk exception helped rescue many of SVB’s uninsured depositors while preventing widespread financial contagion. The Federal Reserve determined that the provisions of the Economic Growth♛, Regulatory Relief, and Consumer Protection Act weakened protections within the banking system. Subsequently, the establishment of the Bank Term Funding Program promised to provide relief for banks facing insolvency, with the goal of preventing future bank failures.