On March 10, 2023, Silicon Valley Bank (SVB) failed after a bank run, marking the third-largest bank failure in United States history and the largest since the 2008 financial crisis. It was one of three bank failures, along with Silvergate Bank and Signature Bank, in March 2023 in the United States.
Seeking higher investment returns from its burgeoning deposits, SVB had dramatically increased its holdings of long-term securities since 2021, accounting for them on a hold-to-maturity basis. The market value of these bonds decreased significantly through 2022 and into 2023 as the Federal Reserve raised interest rates to curb an inflation surge, causing unrealized losses on the portfolio. Higher interest rates also raised borrowing costs throughout the economy and some Silicon Valley Bank clients started pulling money out to meet their liquidity needs. To raise cash to pay withdrawals by its depositors, SVB announced on Wednesday, March 8 that it had sold over US$21 billion worth of securities, borrowed $15 billion, and would hold an emergency sale of some of its treasury stock to raise $2.25 billion. The announcement, coupled with warnings from prominent Silicon Valley investors, caused a bank run as customers withdrew funds totaling $42 billion by the following day.
On the morning of March 10, the California Department of Financial Protection and Innovation seized SVB and placed it under the receivership of the Federal Deposit Insurance Corporation (FDIC). An additional $100 billion were expected to be withdrawn during Friday. About 89 percent of the bank's $172 billion in deposit liabilities exceeded the maximum insured by the FDIC. Two days after the failure, the FDIC received exceptional authority from the Treasury and announced jointly with other agencies that all depositors would have full access to their funds the next morning. Seeking to auction off all or parts of the bank, the FDIC reopened it on Monday March 13 as a newly organized bridge bank, Silicon Valley Bridge Bank, N.A. Although some characterized the government response as a bailout, the plan did not entail rescuing the bank, its management or shareholders, but rather making uninsured depositors whole from the proceeds of selling the bank's assets, without the use of taxpayer money.
The collapse of SVB had significant consequences for startup companies in the U.S. and abroad, with many briefly unable to withdraw money from the bank. Other large technology companies, media companies, and wineries were also affected. For a number of founders and their venture capital backers, this was the bank of choice.
Background
SVB was a commercial bank founded in 1983 and headquartered in Santa Clara, California. At its collapse, SVB was the 16th largest bank in the U.S. by total assets and was heavily skewed toward serving companies and individuals from the technology industry. Nearly half of U.S. venture capital-backed healthcare and technology companies were financed by SVB. Companies such as Airbnb, Cisco, Fitbit, Pinterest, and Block, Inc. have been clients of the bank. In addition to financing venture-backed companies, SVB was well known as a source of private banking, personal credit lines, and mortgages to tech entrepreneurs, and specialized lending money to higher-risk new companies. Silicon Valley Bank required an exclusive relationship of those borrowing from the bank. Prior to Thursday March 9, 2023, SVB was in "sound financial condition", according to the California Department of Financial Protection and Innovation, though an increased number of short sellers began to target SVB earlier in the year. Employees received their annual bonuses on March 10, 2023, hours before the government took control of the company.
As of the last call report of the bank, filed on December 31, 2022, it held $209 billion in total assets, with $175.5 billion in total deposits, of which the bank estimated $151.6 billion (86.4 percent) were uninsured.
Collapse
Losses
The bank's deposits increased from $62 billion in March 2020 to $124 billion in March 2021, benefiting from the impact of the COVID-19 pandemic on science and technology. Most of these deposits were invested in long-term Treasury bonds as the bank sought a higher return on investment than was available on shorter-term bonds. These long-term bonds fell in current market value as interest rates rose during the 2021–2023 inflation surge and they became less attractive as investments relative to newer bond issues. In April 2022, SVB's chief risk officer stepped down, and a successor was not named until January 2023—a period coinciding with the period of interest rate increases.
At the end of 2022, the bank had a $117 billion bond portfolio, divided into a $91.3 billion held-to-maturity portfolio (meaning it was not marked to market and profits or losses would not be realized until maturity) and a $26 billion available-for-sale portfolio (which as the name implies was marked to market). At that point in time, its marked-to-market unrealized losses for securities held to maturity exceeded $15 billion. The bank did not hedge against interest rate risk on that part of its bond portfolio, apparently for the same reason that most banks do not: the hedge itself would bounce around with the market, while the point of holding bonds to maturity is to hold them at par. Most banks minimize interest rate risk in their held-to-maturity portfolios by buying shorter-term bonds. The bank did hedge against interest rate risk on its available-for-sale portfolio by building up a portfolio of $15.2 billion of interest rate swaps by the end of 2021.
At the same time, startup companies withdrew deposits from the bank to fund their operations as private financing became harder to come by. A series of layoffs in the technology sector that began in 2022 also caused depositors to draw down their savings. During the first half of 2022, the bank realized $517 million in gains by unwinding $11 billion of its interest rate swaps on its available-for-sale bond portfolio. By the end of the year, it had only $563 million in swaps protecting that portfolio. In early 2023, to raise needed cash to fund withdrawals, the bank sold all of its available-for-sale securities, realizing a $1.8 billion loss. The bank was criticized for timing its announcement shortly after Silvergate Bank, which catered to cryptocurrency users, started winding down its operations, and for not lining up private funding ahead of the announcement.
Some banking experts said that the bank would have managed its risks better had it not been for the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), enacted in 2018 and supported by SVB CEO Greg Becker, which reduced the frequency and number of scenarios of required stress testing implemented under the Dodd–Frank Wall Street Reform and Consumer Protection Act for banks with under $250 billion in assets. The Federal Reserve Bank of San Francisco did have discretion to annually examine any bank with $100 billion in assets. In implementing the regulatory changes, Federal Reserve Vice Chair Randal Quarles also changed the Federal Reserve's bank supervisory culture, allegedly making routine supervision less intense and more predictable.
Instability
A 2021 Federal Reserve review of the bank found several deficiencies in its risk management procedures. The bank failed to fix six citations issued by the Fed and was placed under a full supervisory review in July 2022. In the autumn, San Francisco Fed officials met with SVB senior leaders to discuss the bank's ability to raise cash in a crisis and possible exposure to losses as interest rates rose. Fed officials determined the bank was using flawed models that led SVB officers to incorrectly believe rising interest rates would increase the bank's interest revenue to substantially stabilize its financial condition. By early 2023, the Fed placed SVB in a "horizontal review" of its risk management procedures.
In the week before the collapse, Moody's Investors Service reportedly informed SVB Financial, the bank's holding company, that it was facing a potential double-downgrade of its credit rating because of its unrealized losses. On March 8, 2023, SVB announced it had sold over $21 billion worth of its investments, borrowed $15 billion, and would hold an emergency sale of its stock to raise $2.25 billion, including $500 million to General Atlantic. JPMorgan Chase and Bank of America turned down opportunities to acquire the bank. Despite the steps taken by the bank, Moody's downgraded SVB on March 8.
Investors at several venture capital firms, including executives at Peter Thiel's Founders Fund, Union Square Ventures and Coatue Management urged their portfolio companies to withdraw their deposits from the bank, with Founders Fund withdrawing all of its funds from the bank by the morning of March 9. By the close of business that day, customers had withdrawn $42 billion, leaving the bank with a negative cash balance of about $958 million. Among the financial services companies receiving money from SVB customers were Brex, JPMorgan Chase, Morgan Stanley and First Republic Bank. The value of SVB's shares plummeted until a trading halt was implemented on the morning of March 10.
On February 27, SVB Financial Group CEO Greg Becker sold 12,451 shares of company stock, worth $3.6 million, through an executive trading plan that he filed with the SEC under Rule 10b5-1 on January 26. The rule has been criticized as a loophole allowing for insider trading. Beginning April 1, the SEC will require a minimum 90-day cooling period for most executive trading plans.
Receivership
On the morning of March 10, examiners from the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) arrived at the offices of SVB to assess the company's finances. Several hours later, the California Department of Financial Protection and Innovation seized SVB citing inadequate liquidity and insolvency, and placed it into the receivership of the FDIC. The failure of SVB was the largest by assets of any bank since the 2008 financial crisis and the second-largest failure of an FDIC-insured bank.
According to regulatory reports as of December 31, 2022, uninsured deposits were estimated to represent 89 percent of total deposits at the bank. With no other bank immediately offering to assume or guarantee them, the FDIC organized a Deposit Insurance National Bank of Santa Clara (DINB) to re-open the bank's branches the following Monday and enable access to insured deposits only. It announced that it would begin paying dividends for uninsured funds within the following week as SVB's assets were liquidated. Moody's Investor Service projected a recovery rate for uninsured depositors of 80–90 percent. The FDIC notified Silicon Valley Bank employees that they would be let go in 45 days' time; in the meantime, it offered salaried employees a 50% raise and hourly employees double pay for any overtime. The Federal Reserve Bank of San Francisco stated that the bank's CEO Greg Becker was no longer on its board of directors.
The simultaneous failures of SVB and New York's Signature Bank raised concern about the condition of other regional banks, with particular attention to First Republic Bank and Western Alliance. Faced with the possibility of a broader loss of confidence, on March 12 the Treasury granted the FDIC an exception allowing it to guarantee the uninsured deposits of both failed banks and to cover the expense through special assessments on other member banks. On March 13 the FDIC transferred SVB assets to a new bridge bank, Silicon Valley Bridge Bank, N.A., and appointed Tim Mayopoulos as CEO. The bridge bank consolidated insured and uninsured deposits into a single institution, making it more attractive to prospective buyers. There is a dispute about whether the U.S. government's guarantee to insure depositors in full, rather than just the $250,000 per account protected by law, qualifies as a bailout. President Joe Biden denied the term bailout applies in this particular case. Treasury Secretary Janet Yellen had already ruled out bailing out SVB.
Silicon Valley Bank's overseas subsidiaries held $13.9 billion in deposits. The Bank of England issued a statement that it sought a court order to place the United Kingdom subsidiary of the bank into a Bank Insolvency Procedure. Shanghai Pudong Development Bank issued a statement that its joint operations with SVB, chaired by its own Shanghai-based chairman, were not affected by the collapse as of March 11. Canadian regulator Office of the Superintendent of Financial Institutions (OSFI) temporarily seized control of SVB Canada on March 12. On March 15, OSFI took permanent control of the bank and announced it would restructure SVB Canada to a new bridge bank to be created by the FDIC, after the regulator was unable to find a buyer.
An initial auction of Silicon Valley Bank assets on March 12 attracted a single bid that was not from a bank, after PNC Financial Services and RBC Bank backed away from making offers. Bank of America, JPMorgan Chase, and Goldman Sachs all declined to make offers. The FDIC canceled the auction, scheduling a second to attract bids from major banks, after the systemic risk exception was granted. Mayopoulos urged venture capitalists and startups to keep their deposits in the bridge bank, apparently to improve its financial condition, and suggested that customers return some of the deposits they had recently pulled out of the bank as part of a diversification strategy. A group of venture capitalists called for depositors to keep at least half of their capital in the bank.
The seizure of Silicon Valley Bank's assets severely disrupted SVB Financial Group's operations. The holding company was locked out of its Santa Clara headquarters, which were shared with the bank, forcing it to move its headquarters to its New York City offices. The holding company, bridge bank, and FDIC are discussing how to reorganize payroll systems. All of SVB Financial Group's employees have been on the payroll of Silicon Valley Bank, not SVB Financial Group, while the parent company has been providing employee benefits to all Silicon Valley Bank employees. Some employees had split their time between the two companies.