Welcome Back to "Business Through Elaine's Lens"!!! I am Elaine Hua, and I'm back at my blog after completing my deep dive into how banks can suddenly shut down. Like many of you, I've always viewed banks as bastions of security—the very definition of "safe as houses" (oh, the irony of that expression!). So when Silicon Valley Bank (SVB) collapsed in March 2023, becoming the second-largest bank failure in U.S. history, I was genuinely shocked. How could a bank that was the 16th largest in America, that served nearly half of all U.S. venture-backed technology and life science companies, simply... disappear over a weekend?
This question sent me down a fascinating rabbit hole, and I'm excited to share what I've learned with you today. Pour yourself a cup of tea—this is going to be a comprehensive exploration.
The Meteoric Rise and Spectacular Fall of SVB
Silicon Valley Bank was founded in 1983 by three businessmen during what some mythologize as a poker game, though that's only half the story. One of the founders, Bob Medeiros, was teaching at Stanford when he noticed a recurring problem: tech startups couldn't secure financing from traditional banks. Back then, Silicon Valley was primarily focused on hardware—silicon chips and early PCs like those from Intel and Hewlett Packard.
What made SVB unique was that they understood something traditional bankers didn't: tech companies might have an outdated product that fails, but the R&D and intellectual property behind it could be immensely valuable for future innovations. While conventional banks looked at current profitability, SVB focused on growth potential—a fundamental principle of tech investing that continues today.
Fast forward a few decades, and SVB was riding the coattails of a booming venture capital industry that it had helped facilitate. By 2021, venture investments approached $330 billion, nearly double from the previous year. SVB proudly claimed to be working with about half of all venture-backed tech and healthcare startups in the U.S.
The bank's assets grew from $17 billion in 2011 to a staggering $189 billion a decade later, expanding faster than any bank in the S&P 500—and it wasn't even a member of the index!
The Perfect Storm: How It All Unraveled
What happened to SVB is essentially a textbook example of a bank run, but with modern digital amplification. Let me break down the sequence of events:
Phase 1: The Investment Misstep
During the pandemic in 2020-2021, there was an unprecedented influx of deposits into SVB as tech companies and startups received massive funding amid low interest rates. SVB's deposits skyrocketed from about $60 billion to nearly $190 billion.
With this sudden cash influx, SVB made what would prove to be a fatal decision. They invested about two-thirds of these new deposits—approximately $80 billion—into long-term bonds, particularly mortgage-backed securities (MBS). These investments seemed safe at the time, offering slightly higher yields than short-term alternatives while interest rates were at historic lows.
The bank's asset-liability committee actually received an internal recommendation to invest in shorter-term bonds as a hedge against potential interest rate increases, but executives rejected this idea because it would have reduced their immediate profits.
Phase 2: The Interest Rate Tsunami
Then came the Federal Reserve's aggressive campaign against inflation in 2022. The Fed raised interest rates seven times that year—the most aggressive rate hiking cycle in recent history. This created two massive problems for SVB:
Higher interest rates made it much harder for startups to secure new funding, forcing many to draw down their existing deposits to cover operating expenses. SVB's deposits dropped by $16 billion in 2022—the largest decline in the bank's history.
The value of SVB's bond investments plummeted by roughly $15 billion. When interest rates rise, existing bonds with lower yields become less valuable. This isn't a problem if you hold bonds to maturity, but becomes critical if you need to sell them early.
In SVB's case, they had placed these investments in what's called a "held-to-maturity" (HTM) account, which meant these losses weren't immediately reflected on their financial statements. Specifically, SVB had over 75% of its investments (over $90 billion) in this account, effectively hiding these unrealized losses from market scrutiny.
Phase 3: The Fatal Announcement
On March 8, 2023, SVB made a shocking announcement: they had sold $21 billion of their securities at a $1.8 billion loss and needed to raise $2.25 billion in new capital to shore up their finances. Rather than calming markets, this announcement triggered panic.
SVB's stock plunged 60% in a single day, wiping out $9.6 billion in market value. More critically, it sparked a classic bank run with a digital twist. Venture capitalists, including influential figures like Peter Thiel, began advising their portfolio companies to withdraw funds immediately.
On March 9th alone, depositors attempted to withdraw $42 billion—essentially $29 million per minute! By the end of the day, SVB had a negative cash balance of $958 million.
Phase 4: The Collapse
On Friday, March 10th, regulators at the Federal Deposit Insurance Corporation (FDIC) stepped in and seized control of the bank, making it the largest U.S. bank failure since the 2008 financial crisis.
The collapse was particularly concerning because 95.5% of SVB's deposits were uninsured, exceeding the FDIC's $250,000 protection limit. This meant many startups faced the prospect of losing significant operational funds.
By the following Monday, the government announced that all depositors would be made whole, preventing what could have been a catastrophic ripple effect throughout the tech industry and potentially the broader economy.
What Exactly Is a Bank Run?
To truly understand what happened to SVB, we need to grasp the concept of a bank run. In simple terms, a bank run occurs when a large number of depositors withdraw their money simultaneously due to concerns about the bank's solvency.
Banks operate on what's called "fractional reserve banking." This means they only keep a fraction of their deposits on hand as cash, while lending or investing the rest. This system works fine under normal circumstances, but it creates a fundamental vulnerability: if too many customers demand their money at once, the bank simply won't have enough cash available.
Let me illustrate with a simplified example. Imagine a bank with $1 million in cash deposits. The bank might keep $100,000 in its vault (reserves) and lend out or invest the remaining $900,000. Now, if customers collectively have the right to withdraw $1 million but suddenly try to do so all at once, the bank can only return $100,000. The remaining $900,000 is tied up in loans or investments that can't be liquidated immediately.
This creates what economists call a "coordination problem." Even if a bank is fundamentally solvent (meaning its assets exceed its liabilities over the long term), a bank run can force it into insolvency by compelling it to sell assets at fire-sale prices to meet withdrawal demands.
What makes modern bank runs particularly dangerous is their speed. In the past, news spread slowly, and physical limitations (people actually had to go to a bank branch) constrained how quickly withdrawals could occur. Today, with digital banking and instant communication, billions can be withdrawn in minutes, as SVB painfully discovered.
Why Was SVB So Vulnerable?
Several factors made SVB particularly susceptible to a bank run:
1. Client Concentration Risk
Unlike diversified banks that serve various industries, SVB's client base was heavily concentrated in the tech and startup ecosystem. When this sector experienced trouble, SVB's deposit base became unstable all at once.
The tech community is also extremely interconnected. When influential venture capitalists like Peter Thiel advised their portfolio companies to withdraw funds, word spread rapidly through Silicon Valley's tight-knit networks.
2. Poor Risk Management
SVB operated without a Chief Risk Officer for eight months during a crucial period when interest rates were rising rapidly. This gap in leadership likely contributed to inadequate risk assessment and management.
The bank also failed to properly hedge against interest rate risk. While other banks use derivatives like interest rate swaps to offset potential losses from rising rates, SVB's derivative notional value for hedging represented only 0.3% of its total assets—effectively non-existent compared to industry standards.
3. Regulatory Loosening
During the previous administration, banking regulations were relaxed, particularly for mid-sized banks like SVB. The stricter capital requirements introduced after the 2008 financial crisis were reserved primarily for mega-banks, allowing SVB to invest in securities without adequate oversight.
4. FOMO Decision-Making
SVB's decision to announce both the sale of securities at a loss and a capital raise simultaneously created unnecessary panic. The bank could have potentially weathered the storm with a more measured approach to addressing its liquidity needs.
The Broader Banking System: Should We Be Worried?
The collapse of SVB, along with Silvergate Bank and Signature Bank in the same week, naturally raises questions about the stability of the entire banking system.
However, there are several reasons why this situation differs from the 2008 financial crisis:
Size and Scope: Despite its importance in the tech sector, SVB was still relatively small compared to giants like JPMorgan Chase or Bank of America. The total assets of SVB, Silvergate, and Signature combined represent only a fraction of the U.S. banking system's total assets.
Different Root Causes: The 2008 crisis stemmed from toxic mortgage securities that had permeated the entire financial system. SVB's problems were primarily related to interest rate risk management and client concentration—issues that are somewhat unique to its business model.
Regulatory Response: Authorities moved swiftly to contain the problem, guaranteeing all deposits at the failed banks and creating a new Bank Term Funding Program to provide additional liquidity to eligible institutions. This decisive action helped prevent wider panic.
Bank Health Indicators: Major U.S. banks have higher capital and liquidity ratios today than in 2008, making them better equipped to withstand economic shocks. The largest four U.S. banks (JPMorgan, Bank of America, Citigroup, and Wells Fargo) have liquidity coverage ratios ranging from 112% to 151%, meaning they can meet expected withdrawals even under stressed conditions.
That said, the SVB collapse did expose vulnerabilities in our banking system:
Unrealized Losses: Many banks are sitting on significant unrealized losses in their held-to-maturity portfolios due to rising interest rates. Bank of America, for instance, had unrealized losses exceeding $100 billion as of early 2023—representing about 60% of its Common Equity Tier 1 capital.
Uninsured Deposits: The high percentage of uninsured deposits at some banks creates potential instability if depositors become concerned about safety.
Digital Acceleration: The speed at which information spreads and money moves in our digital age can turn concerns into crises almost instantly.
Personal Reflections: Banking in an Age of Uncertainty
After all this research, I've found myself reflecting on the nature of banking trust. Banks fundamentally operate on confidence—the belief that your money will be there when you need it. When that confidence erodes, even temporarily, the consequences can be devastating.
What strikes me most about the SVB collapse is how quickly it happened. In just 48 hours, a bank with a 40-year history, rated as one of America's best banks by Forbes for five consecutive years, simply ceased to exist. The speed is breathtaking and somewhat terrifying.
For businesses and individuals alike, this serves as a sobering reminder of the importance of diversification. Keeping all your funds in a single institution—regardless of how stable it seems—creates unnecessary risk in today's volatile environment.
It also highlights the valuable role of deposit insurance in maintaining financial stability. The FDIC's $250,000 insurance limit may be sufficient for most individuals, but it's woefully inadequate for businesses with operational needs requiring larger cash reserves.
Looking Ahead: Lessons for the Future
So what can we learn from this banking drama? Several key takeaways come to mind:
Risk management matters: SVB's failure to properly manage interest rate risk despite clear warning signs should serve as a cautionary tale for all financial institutions.
Concentration creates vulnerability: Whether in a bank's investment portfolio or its customer base, concentration amplifies risk.
Transparency builds trust: Clear, proactive communication during times of stress can prevent panic. SVB's announcement approach likely accelerated its demise.
Regulation serves a purpose: While regulatory requirements can seem burdensome, they exist for a reason—to prevent exactly this type of financial instability.
Digital runs happen at lightning speed: In our interconnected world, bank runs can unfold in hours rather than days, leaving little time for intervention.
As I conclude my exploration of this banking crisis, I'm left with mixed feelings. On one hand, the system worked—depositors were protected, and widespread contagion was prevented. On the other hand, the ease with which a major bank collapsed reveals persistent vulnerabilities in our financial infrastructure.
Banking, I've realized, exists in a delicate balance between risk and reward, trust and verification, innovation and stability. Finding the right equilibrium remains one of the great challenges of our economic system.
I'd love to hear your thoughts on this topic. Have recent banking events changed how you think about financial security? Are you taking any steps to diversify your banking relationships? Share in the comments below!
Until next time, Elaine