What Was the Collapse of Silicon Valley Bank?

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California closed Silicon Valley Bank on 10 March 2023

On Friday 10 March 2023 California's banking regulator closed Silicon Valley Bank (SVB), based in Santa Clara. At the end of 2022 the bank had held about $209 billion of assets, the loans and investments a bank owns, the Federal Deposit Insurance Corporation (FDIC), the US deposit insurer, said. Most of its customers were technology and life-sciences companies and the venture capital firms that invest in them. Two days before it closed, the bank had announced a plan to raise new money from investors.

SVB grew fast as a bank for technology firms

SVB lent to, and held deposits for, young technology and life-sciences firms, many of them backed by venture capital, investors who buy stakes in new businesses. From 2019 to 2021, while venture capital investment grew fast and interest rates were very low, its assets grew from $71 billion to over $211 billion. That is the account of the Fed, which was also the bank's main federal supervisor.

In the US, deposit insurance from the FDIC guarantees deposits up to $250,000 per depositor at each bank. Money above that limit is uninsured. Most of SVB's deposits, the Fed found, were uninsured.

On 8 March SVB announced a loss and a plan to raise capital

SVB had put much of its depositors' money into securities, bonds that pay a fixed return. When interest rates rise, bonds already issued lose value, since new ones pay more.

On Wednesday 8 March 2023 SVB said it had sold $21 billion of its securities and was booking a loss of $1.8 billion after tax. It also planned to raise $2.25 billion of new capital, money from shareholders that can absorb losses. It told investors to expect slower growth amid a continued slowdown among its technology customers, and said two credit rating agencies, firms that grade how safe it is to lend to a company, were considering marking it down.

Depositors pulled their money out on 9 March

On Thursday 9 March depositors withdrew over $40 billion, and managers expected over $100 billion more the next day. Together that was roughly 85 per cent of its deposits. The withdrawals appear to have been sparked by linked factors, the Fed's review says: worry about the technology sector, possible rating downgrades, and a close network of venture capital investors and technology firms pulling out together, spurred by social media. SVB lacked the cash, or assets to borrow against, to pay that fast, Michael Barr, the Fed's Vice Chair for Supervision, told the Senate.

The next day California's regulator closed SVB and made the FDIC its receiver, the body that winds up a failed bank. Insured deposits went to a new FDIC bank, open by Monday. Uninsured depositors were promised an advance payment within a week and, for the rest, a receivership certificate, a claim on money from selling SVB's assets.

The US authorities acted on Sunday 12 March

The failure threatened to spread to other banks, Barr told the Senate. Signature Bank, a New York bank that had also suffered a run, was closed by New York state regulators on Sunday 12 March. That day the Treasury Secretary, Janet Yellen, approved a systemic risk exception, an emergency power that let the FDIC guarantee every deposit at both banks, all of it reachable the next day. Shareholders and certain unsecured debtholders, lenders with no assets pledged to them, were not protected, and senior managers were removed. Any loss to the FDIC's Deposit Insurance Fund, the pool it pays insured depositors from, caused by protecting uninsured depositors was to be recovered by a special charge on banks, not from taxpayers, the Treasury, the Fed and the FDIC said. SVB's parent company filed for bankruptcy on 17 March, the Fed's review notes.

The Fed opened a lending programme, and banks borrowed heavily

The Fed also opened the Bank Term Funding Program (BTFP) that weekend: loans of up to one year against US government bonds and similar securities, valued at par, the amount due when they are repaid, not their market price. The Treasury set aside $25 billion from its Exchange Stabilization Fund, a reserve it controls, to cover any losses.

Banks could also borrow at the discount window, the Fed's standing facility for loans against collateral, assets pledged as security. From that Sunday banks could borrow more there against the same securities the BTFP took.

The chart shows the discount window's standard loan, primary credit, each Wednesday in the first half of 2023; BTFP loans are counted separately and are not in it. It stood at about $4.6 billion on 8 March and about $152.9 billion a week later.

SVB's British bank and its US business were sold

SVB also owned a British bank, Silicon Valley Bank UK, with deposits of about £6.7 billion. On Monday 13 March the Bank of England, using its powers under the Banking Act 2009, sold it to HSBC. The Financial Stability Board, an international body of financial regulators, records the price as £1. The UK government said no taxpayer money was involved.

In the US the FDIC ran SVB as a bridge bank, a temporary bank it controls until a buyer is found. On 26 March First Citizens Bank agreed to take on all its deposits and loans. That day the FDIC estimated that the failure would cost its Deposit Insurance Fund about $20 billion.

SVB had tripled in size from 2019 to 2021 and failed two days after its announcement. Why was it so exposed to a run, and what changed after it failed? The next module takes it up.

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