Silicon Valley Bank’s deposits doubled in a year, from $62 billion in March 2020 to $124 billion in March 2021. Then, in March 2023, depositors withdrew $42 billion, and the FDIC took the bank over on March 10.
The 16th largest bank in America, SVB had made its name financing venture-backed startups, many of them in web3. Its collapse took 48 hours. It was the second-largest bank failure in U.S. history and the largest since the 2008 financial crisis.
Where the money went
The problem was what SVB did with the cash. Reports said it put the funds into long-term Treasury bonds and mortgage-backed securities, and 97% of its mortgage-backed holdings had maturities of more than 10 years, at an average yield of 1.56%. Then the Federal Reserve raised rates through 2022 and early 2023, and those securities lost most of their value. The bank was reported to be sitting on $15 billion in unrealized losses.
Startups began taking their money out faster than SVB could cope. To meet withdrawals, the bank sold long-term securities at a $1.8 billion loss. It sold more than $21 billion worth of investments in all and borrowed $15 billion. The bank then announced it needed to raise $2.25 billion to shore up its balance sheet. Customers withdrew $42 billion, and the bank ended with a negative cash balance.
Uninsured and exposed
The FDIC covers up to $250,000 per depositor. Most SVB customers were businesses holding far more than that. SVB had over $175 billion in deposits and $209 billion in total assets at the end of the previous year, and the vast majority of the deposits were uninsured.
Treasury Secretary Janet Yellen told CBS’ “Face the Nation” that a major government bailout was not on the table, though regulators were weighing a range of options, including a sale. Former FDIC Chair Sheila Bair called finding a buyer “the best outcome.” Billionaire Bill Ackman wanted something stronger. “The failure of Silicon Valley Bank could destroy an important long-term driver of the economy,” he said, pointing to how heavily VC-backed companies rely on the bank for loans and operating cash.
Venture firms were themselves part of the story. Founders Fund, USV and Coatue were reportedly among those that withdrew their own money and told portfolio companies to do the same before the run. Accel, Cowboy Ventures, Greylock, Lux Capital and Sequoia signed a joint statement saying they would do business with SVB again if it were “purchased and appropriately capitalized.”
Crypto catches the shock
The damage reached crypto quickly. Circle, which issues the second-largest stablecoin, USDC, confirmed it had $3.3 billion at SVB. Rumors spread and USDC lost its peg to the dollar. Coinbase paused USDC to USD conversions, and Binance stopped auto-converting USDC to BUSD.
Stablecoins partly backed by USDC, such as DAI and FRAX, were hit as well. MakerDAO held over $3.1 billion worth of USDC as collateral behind DAI.
In Europe, Deutsche Bank and Societe Generale each fell by over 6% on March 10.
Sources
- How The Silicon Valley Bank Bankruptcy Triggered $USDC Depegging
- Silicon Valley Bank's Collapse Triggers Run on Bank and Massive Short-Selling as FDIC Seeks Buyer
