At the close of business on March 9, 2023, Silicon Valley Bank had a negative cash balance of about $958 million. Customers had pulled out $42 billion in a single day. By the next morning, California regulators had shut the bank down.
The California Department of Financial Protection and Innovation seized SVB on March 10, citing inadequate liquidity and insolvency, and handed it to the Federal Deposit Insurance Corporation as receiver. Examiners from the Federal Reserve and the FDIC had arrived at the bank’s offices that morning. Employees were paid their annual bonuses hours before the government took control. The failure was the largest of any bank since the 2008 financial crisis and the second-largest of an FDIC-insured bank.
A bank built for one industry
SVB was founded in 1983 and headquartered in Santa Clara, California. When it failed it was the 16th largest bank in the country by total assets. Its customers were overwhelmingly tech: nearly half of U.S. venture capital-backed healthcare and technology companies were financed by it, and clients included Airbnb, Cisco, Fitbit, Pinterest and Block, Inc. Venture funds often required their portfolio companies to bank there, and by one count 50% of all U.S. startups had a relationship with SVB.
That concentration became the weakness. Deposits jumped from $62 billion in March 2020 to $124 billion in March 2021, and most of the cash went into long-term Treasury bonds. Those bonds lost market value as the Federal Reserve raised rates. At the end of 2022, the bank’s $117 billion bond portfolio included a $91.3 billion held-to-maturity book, and unrealized losses on those holdings exceeded $15 billion.
How the run started
Tech layoffs and a drought in private financing had startups drawing down their accounts. To cover withdrawals, SVB sold all of its available-for-sale securities in early 2023 and took a $1.8 billion loss. On March 8 it announced that it had sold over $21 billion worth of securities and borrowed $15 billion. It also said it would hold an emergency stock sale to raise $2.25 billion. Moody’s downgraded the bank the same day.
Investors at several venture firms, among them Founders Fund, Union Square Ventures and Coatue Management, urged portfolio companies to move their money. Founders Fund had pulled all of its own funds by the morning of March 9. The bank was criticized for the timing of its announcement, which came shortly after crypto lender Silvergate Bank began winding down, and for not lining up private funding first.
The insured limit
The FDIC insures deposits up to $250,000. At the end of 2022, SVB held $175.5 billion in total deposits, and it estimated that $151.6 billion of them, or 86.4 percent, were uninsured. Many startups found themselves briefly unable to withdraw money.
On March 12, the Treasury granted the FDIC an exception that let it guarantee uninsured deposits at SVB and at New York’s Signature Bank. The plan covered depositors but not the bank’s shareholders or bondholders. The FDIC reopened SVB on March 13 as a bridge bank, Silicon Valley Bridge Bank, N.A.
Sources
- Collapse of Silicon Valley Bank – Wikipedia
- Silicon Valley Bank (SVB) Collapse — Second Largest All-Time Failure
Sources
- Collapse of Silicon Valley Bank – Wikipedia
- Silicon Valley Bank (SVB) Collapse — Second Largest All-Time Failure
