• Silicon Valley Bank (SVB) has quickly become the second-largest bank failure in US history, behind Washington Mutual which failed in 2008.
  • SVB is a top 20 US commercial bank and was founded forty years ago. But it took just a matter of hours for the group, most favoured by tech startups, to fall by the wayside.
  • The regional bank capitalised huge losses while liquidating bond positions to meet a torrent of withdrawal demands. Depositors were spooked by a bank announcement that it needed to raise US$2.25b to shore up its balance sheet.
  • In the aftermath of the GFC, regulators tightened what assets could be held on bank balance sheets and regularly stress-tested the sector. As a result, US government bonds holdings in the banking system rose dramatically in the post-GFC era.
  • But if those securities are purchased at ultra-low yields and cannot be held to maturity there is an elevated risk of large capital losses in the event of a bond market selloff.
  • Most US banks prudently hedged against the risk of rising interest rates by purchasing ‘swap’ securities that gain in value as bond market yields move higher, largely offsetting any losses.
  • It seems SVB had been unprepared to pay this insurance premium of sorts (and may have been legally prohibited from doing so in some instances), even for longer term bonds where rising yields can severely punish capital values.
  • To cap things off, SVB simultaneously faced a much higher cost of short-term debt funding, thanks to the US Fed sharply raising rates over the last twelve months.
  • With fresh equity capital nowhere to be found and private venture capital funds advising portfolio-held tech companies to withdraw their money, SVB’s mounting losses saw regulators place the bank in receivership under the Federal Deposit Insurance Corporation (FDIC).
  • With the banking system facing crisis, authorities moved swiftly to bail out depositors and created a temporary facility for impacted institutions to help prevent realising losses in order to meet depositor withdrawal demands.


The sudden demise of Silicon Valley Bank (SVB) has caught not just its depositors, but markets by surprise. In the space of a few short hours, a classic bank run unfolded as SVB unexpectedly found itself with inadequate liquid assets to meet depositor withdrawal demands. This has placed the spotlight on the broader banking sector and raised questions about risks of contagion.

Is SVB a special case?

For a commercial bank, deposits typically make up most of its liabilities. Many of SVB’s depositors are tech start-ups, who also rely on private venture capital to supply their funding needs. The tech companies are usually held as part of a portfolio of equity exposures by the venture capitalists, who can exert strong influence over those companies’ operations.

As the US Fed hiked interest rates at breakneck speed and the era of free money was consigned to history, venture capital funding started to dry up. Hence throughout early 2023, depositors began withdrawing funds from SVB at a much higher rate. This forced the bank to liquidate assets (including “low risk” government bonds and mortgage-backed securities) that had suffered large falls in value due to the rising interest rate environment. And SVB held too many longer dated assets that were classified in a way that legally prevented it from mitigating this interest rate risk.

The losses quickly mounted and were made public when SVB announced that it needed to raise US$2.25b to shore up its balance sheet. The venture capital funds saw the writing on the wall and instructed their portfolio companies to withdraw the rest of their money. This ensured that SVB’s liquidity issues would become intractable and within hours the mismatch of liquid assets versus withdrawal requests became overwhelming.

Is the failure of SVB symptomatic of a greater issue?

As the regulators intervened, there was great uncertainty as to what might become of the uninsured component of the deposits. The Federal Deposit Insurance Corporation (FDIC) guarantees repayment of deposits up US$250k. Depositors above this amount are classed as unsecured creditors. With less than 5% of SVB’s deposits lower than this amount, it seemed that many smaller tech businesses would be unable to pay staff until their deposits were returned in full (which could have other economic ramifications).

Initially, US Treasury Secretary Janet Yellen (and former chief of the US Fed) said there would be no bailout because the collapse of SVB looked very different from the events of the GFC, so “no domino effect” would take place. However, within just hours of these comments, the New York-based Signature Bank also failed, and the FDIC was appointed as receiver. With confidence in the US banking system beginning to plummet, the FDIC and the US Fed, in consultation with President Biden, approved an FDIC resolution to effectively bail out these banks’ depositors. Shareholders and some unsecured creditors will not be protected and will lose all their investments.

Concluding remarks

Banking systems heavily rely on trust. In the aftermath of the GFC, in a bid to ensure confidence, regulators tightened what assets could be held on bank balance sheets and regularly stress-tested the sector. As a result, US government bonds holdings in the banking system rose dramatically in the post-GFC era.

However, the onset of Covid saw policy makers drive interest rates down to zero (and even negative). This helped to create a new tech boom and, with it, came a surge in demand for banking services from an explosion venture capital-backed tech startups.

In the case of SVB, its deposits nearly doubled and this required a similar rise in its assets. At the time of its failure, SVB held more than 40% of its assets in the form of long-dated Treasurys and mortgage-backed securities ─ “low-risk” investments that complied with post-GFC regulatory policy. But many of these bonds were purchased when yields were low and prices were high … at a time the US Fed was guiding for rates to stay low as part of the inflation its transitory narrative (sound familiar?).

This encouraged (if not incentivised) SVB to purchase too many of these securities under a classification of “held to maturity”, which formally prohibits hedging against interest rate risk, regardless of changes in market yields. SVB was doing the right thing by the regulators, but it quickly became a case of no good deed goes unpunished…

…And with the dominoes falling, the US Treasury designated both SVB and Signature Bank as “systemic risks”, giving it authority to unwind both institutions in a way that it said “fully protects all depositors.” For some, this will be seen as a win for the purveyors of moral hazard. Others will see it as the right thing to do by regulators, as it was partly of their own making.

An important component of the measures is that the US Fed will create a separate facility that will provide loans up to one year for institutions impacted by the bank failures. Institutions using the facility will be asked to pledge “high-quality” collateral such as Treasurys, agency debt and mortgage-backed securities (which no doubt will be carrying huge unrealised losses). This will allow banks to address liquidity issues without becoming forced sellers of securities that they were compelled and encouraged to purchase by the regulators.



Scott Malcolm has been awarded the internationally recognised Certified Financial Planner designation from the Financial Planning Association of Australia and is Director of Money Mechanics.  Money Mechanics is a fee for service financial advice firm who partner with clients in Melbourne, Canberra and Sydney to achieve their life and wealth outcomes. Money Mechanics Pty Ltd (ABN 64 136 066 272) is a Corporate Authorised Representative (No. 336429) of Infocus Securities Australia Pty Ltd (ABN 47 097 797 049) AFSL and Australian Credit Licence No. 236523


The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs.  Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.