Why Silicon Valley Bank Failed

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Where this sits

SVB put much of its deposits into long-dated bonds

At the end of 2022, 55 per cent of SVB's assets, the loans and investments a bank owns, were securities, bonds and similar investments, and 35 per cent loans. At other US banks with over $100 billion of assets, leaving out the very largest, the shares were 25 and 58 per cent, the Federal Reserve (the Fed), the US central bank, found. Most of its bonds were held to maturity, kept until repaid. Most of those held to maturity were long-dated: government-backed home-loan bonds due in 10 years or more.

Most of SVB's deposits were above the insurance limit

Deposit insurance from the Federal Deposit Insurance Corporation (FDIC), the US deposit insurer, covers up to $250,000 per depositor at each bank. About 94 per cent of SVB's deposits were above that limit at the end of 2022, against 41 per cent at the same group of peer banks, the Fed found in its review of SVB's supervision. Many deposits belonged to start-ups that had no sales income yet and kept large cash balances to pay staff and bills, Michael Barr, the Fed's Vice Chair for Supervision, told the Senate. They were linked through the same venture capital firms, investors who buy stakes in new businesses.

In 2022, as rates rose and technology firms' activity slowed, deposits began to flow out, the review says. From July 2022 the bank repeatedly failed its own liquidity stress tests, checks of whether it could raise enough cash under strain.

US interest rates rose fast from March 2022

Central banks raised interest rates in 2022 to curb high inflation, the Basel Committee, the international committee of bank supervisors, notes, and long-dated bonds lost much of their value. The chart shows the top of the Fed's target range, the band it sets for the rate banks charge each other for overnight loans: 0.25 per cent until 16 March 2022, and 4.75 per cent from 2 February 2023.

SVB kept its held-to-maturity bonds on its books at what it had paid for them. A fall in their price showed only as an unrealised loss, a loss on paper that becomes real if the bonds are sold. At the end of 2022 those losses came to over $15 billion, 89 per cent of the bank's core capital, the shareholders' money that absorbs losses first, according to a preliminary review by the Government Accountability Office (GAO), Congress's audit office.