On March 10, 2023, Silicon Valley Bank (SVB) suffered a bank run and subsequently failed, causing the second-largest bank failure in US history and the largest since the 2007-2008 financial crisis. This failure has sparked concerns about a potential domino effect on the US economy and beyond.
SVB had significantly increased its holdings of long-term securities to seek higher investment returns from its deposits. However, as the Federal Reserve raised interest rates to curb inflation in 2022 and 2023, the market value of these bonds decreased, causing unrealized losses on the portfolio. Additionally, higher interest rates raised borrowing costs throughout the economy, causing some of SVB’s clients to withdraw their money to meet liquidity needs.
To raise cash to pay withdrawals, SVB announced that it had sold over $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. However, the announcement, coupled with warnings from prominent Silicon Valley investors, caused a bank run, with customers withdrawing funds totaling $42 billion by the following day.
As a result of the bank run, the California Department of Financial Protection and Innovation seized SVB on March 10 and placed it under the receivership of the Federal Deposit Insurance Corporation (FDIC). With 89% of the bank’s $172 billion in deposit liabilities exceeding the maximum insured by the FDIC, concerns were raised about the potential impact on the broader economy.
The failure of SVB has had significant consequences for startup companies in the US 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, SVB was the bank of choice.
While the government response has been characterized as a bailout, the plan did not entail rescuing the bank, its management, or shareholders. Instead, the FDIC reopened SVB as a newly organized bridge bank, Silicon Valley Bridge Bank, N.A., seeking to auction off all or parts of the bank to make uninsured depositors whole from the proceeds of selling the bank’s assets without using taxpayer money.
The failure of SVB has raised concerns about the potential for further bank failures and the impact on the wider economy, particularly in the technology sector. The Federal Reserve has signaled that it will closely monitor the situation and take appropriate action to mitigate any potential risks.