Silicon Valley Bank (SVB) began in Santa Clara, California, in 1983, founded by two former Bank of America executives who reportedly discussed the idea during a poker game. By year-end it ranked as the 16th largest commercial bank in the United States, holding about $209 billion in assets and $175.4 billion in deposits, with more than 8,500 staff and 17 offices across California and Massachusetts. The bank also maintained a presence in the United Kingdom, Europe, Asia, and the Middle East. SVB specialized in funding technology startups and venture capital firms focused on innovative and healthcare companies. It stood out as a commercial bank with some characteristics closer to a securities institution in certain markets. This made SVB the first U.S. bank to fail since the small Almena State Bank in Kansas in 2020, and the second-largest bank failure in modern U.S. history after Washington Mutual in 2008, when the banking sector experienced a significant upheaval.
Why did the bank fall?
The decline can be traced to a sharp rise in official rates as the Federal Reserve moves to curb inflation. The Fed tightened policy to around 4.5–4.75%, while deposits at SVB swelled in the two years following the COVID-19 shock, benefiting tech sector revenues. The bank deployed much of these deposits into public U.S. Treasuries, a common move for liquidity management. But when interest rates climb, the market value of these fixed-rate assets falls, eroding the value of the bank’s asset base relative to its purchase cost.
What was the trigger for its fall?
By year-end, the decline in the mark-to-market value of SVB’s public debt portfolio reached about $15 billion, a figure that approached the bank’s own capital base of roughly $16.2 billion. Some observers described this as a hidden risk that would have been manageable if the bank held the assets to maturity, rather than selling them at a loss to raise liquidity. Market chatter intensified after Moody’s warned of a potential downgrade in debt ratings, prompting SVB to reevaluate its position and sell a substantial portion of its holdings, approximately $21 billion, even at a loss of around $1.8 billion, in hopes of shoring up liquidity. The bank also announced plans to raise about $2.25 billion in additional capital to bolster solvency as part of the maneuver.
Why did the plan fail?
SVB appeared aware that the move would unsettle both depositors and investors. Yet management believed a downgrade by Moody’s would amplify the panic, so it pressed ahead with its strategy in consultation with its advisory partners. Moody’s subsequently issued a downgrade, accelerating the withdrawal dynamics. Some major clients, including prominent venture funds, began advising portfolio companies to pull funds from SVB. The result was a record wave of withdrawals, with about €42 billion leaving in a single day, pushing SVB into a negative liquidity position near $1 billion. Shares tumbled, and regulators stepped in to stabilize the situation.
Why did investors’ fear spread to other banks?
In the United States, insured deposits cover up to $250,000. Yet SVB’s exposure implied that a large share of its deposits would not be protected under the standard guarantee framework, raising concerns about the broader tech and startup ecosystem in California and beyond. The fear extended to other banks whose bond portfolios could also suffer as rates rise. Officials responded by taking decisive action over the weekend to safeguard stability in the banking system, with additional measures considered to prevent contagion. A parallel case involved New York-based Signature Bank, which faced pressures tied to its own asset mix after broader market turmoil, while Silvergate announced liquidation intentions.
What did authorities do to prevent contagion, and will it be enough?
In response to the unfolding crisis, the U.S. government and central bank offered extraordinary support and guaranteed deposits below the $250,000 threshold, while investors beyond that cap would bear losses. The program involved a liquidity facility allowing banks to borrow against U.S. Treasuries, helping to avert forced asset sales at depressed prices. This approach aimed to arrest the liquidity drain and restore confidence, but questions remain about the sufficiency of the measures. The core issue, many experts note, is liquidity risk and the speed at which trust can erode in a fast-moving panic.