Silicon Valley Bank
From Invertopedia, the encyclopedia of how things fail
Silicon Valley Bank served mainly technology and life sciences companies, many of them backed by venture capital, and it tripled in size between 2019 and 2021[2]. It put much of that deposit money into longer-term securities, which lost value as interest rates rose in 2022[2]. On March 9, 2023 customers pulled $42 billion, and about $100 billion more was set to leave the next day, together about 81% of its deposits at the end of 2022[3]. California regulators closed the bank on March 10, the biggest US bank failure since 2008[3].
Contents
The bet
SVB's clients were flush with venture money in a period of very low interest rates, and their deposits poured in[2]. The bank put much of that money into long-term Treasurys and other bonds with long maturities[2][5]. The bet was that rates would stay low, or that deposits would stay put long enough for the bonds to mature.
Management managed rate risk for short-run profit and for protection against falling rates, and it removed hedges that would have protected it against rising ones[2]. When its own limits said the risk was too high, it changed its modelling assumptions instead of the risk[2].
What happened
| 2019 – 2021 | SVB grows from $71 billion to over $211 billion in assets, without facing tougher supervisory or regulatory standards.[2] |
|---|---|
| Nov 2021 | Fed supervisors issue six findings that its liquidity risk management is below expectations.[2][3] |
| 2022 | Interest rates rise. Deposits start to leave and unrealized losses on SVB's securities grow fast. The chief risk officer leaves in April and the bank repeatedly fails its own liquidity stress tests from July.[2] |
| Mar 8, 2023 | SVB says it sold $21 billion of securities at a $1.8 billion after-tax loss and plans to raise $2.25 billion in capital. The same day Silvergate says it will wind down.[2] |
| Mar 9, 2023 | Depositors, many of them linked through venture investors and social media, pull $42 billion, about a quarter of the bank's assets.[2][3][5] |
| Mar 10, 2023 | The bank tells regulators that $100 billion is scheduled to go out that day. California's financial regulator closes it and appoints the FDIC as receiver.[2][3] |
| Mar 12, 2023 | The FDIC, the Fed and the Treasury invoke a systemic risk exception so all deposits, insured or not, are covered.[1] |
| Mar 26, 2023 | First Citizens agrees to take on the deposits and loans of the bridge bank the FDIC set up.[1][4] |
| Apr 28, 2023 | The Fed's own review calls the failure "a textbook case of mismanagement by the bank" and says its supervisors did not act with enough force.[2] |
The kill shot
SVB lent long and borrowed short. Its deposits could leave in hours, its bonds lost value as rates rose, and its depositors all talked to each other.
About 94% of SVB's deposits were above the insurance limit[2], so almost every client had a reason to run once they doubted the bank. The March 8 announcement told them the bank was selling bonds at a loss and needed capital[2]. The Fed's review describes venture investors and tech firms, "fueled by social media," pulling uninsured deposits "in a coordinated manner at an unprecedented rate"[2].
The scale had no precedent. The Fed estimates Wachovia lost about $10 billion over 8 days in 2008 and Washington Mutual $19 billion over 16 days[2]. SVB lost over $40 billion in one day and expected over $100 billion the next, roughly 85% of its deposit base at the time, by the Fed's count[2]. It did not have enough cash or collateral ready, and it had not run test transactions at the Fed's discount window[2].
Red flags ignored
- Growth with no new rules. The bank tripled in size in two years while it was not yet subject to heightened supervisory or regulatory standards.[2]
- Almost all deposits uninsured. About 94% of deposits were above the insured limit at the end of 2022.[2]
- Hedges removed as rates rose. SVB breached its own long-term rate risk limits on and off from 2017, then changed its models rather than its positions.[2]
- No chief risk officer. The chief risk officer left in April 2022, and supervisors chose not to cite the bank for the vacancy while it searched for a replacement.[2]
- 31 open findings. SVB had 31 open supervisory findings when it failed, about triple the number at peer firms.[2]
The cost
The FDIC estimated the failure would cost its Deposit Insurance Fund about $20 billion[1][4]. To cover uninsured deposits at SVB and Signature Bank, the FDIC approved a special assessment on banks of about $16.3 billion in November 2023, and by the end of 2023 it had raised its estimate of those losses to $20.4 billion[1].
The parent company, SVB Financial Group, later went bankrupt[2]. First Citizens bought about $72 billion of assets at a $16.5 billion discount, and about $90 billion of securities and other assets stayed with the FDIC to be sold[4].
The inversion
Match how long you lock money up to how fast it can be asked for back. If your depositors are concentrated, uninsured and in the same group chats, assume they will all leave on the same day.
What survived
The customers. Every depositor was covered under the systemic risk exception[1], and SVB's 17 branches reopened as First Citizens branches on March 27, 2023[4].
The rulebook. The Fed said it would revisit its rules for banks with $100 billion or more in assets, look again at how stable uninsured deposits really are, and said more banks should have to count unrealized losses on available-for-sale securities in their capital[2].
References
- ^ “FDIC History: 2020–Present”. FDIC. Santa Clara, the March 12 systemic risk exception, the March 13 bridge bank, the First Citizens deal and $20 billion cost, and the $16.3 billion special assessment raised to $20.4 billion.
- ^ “Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank”. Board of Governors of the Federal Reserve System, April 28, 2023. The primary record: growth from $71 billion to over $211 billion, about $212 billion at failure, 94% uninsured, long-term securities, removed hedges and changed models, failed liquidity stress tests, the CRO's departure, the November 2021 findings, 31 open findings, the March 8 restructuring, the over $40 billion and over $100 billion outflows, the Wachovia and WaMu comparison, the closure and FDIC receivership, the SVBFG bankruptcy, the "textbook case" quote and planned rule changes.
- ^ “SVB customers tried to withdraw nearly all the bank's deposits over two days, Fed's Barr testifies”. CNBC, March 28, 2023. Barr's Senate testimony: $42 billion on March 9, $100 billion scheduled for March 10, 81% of $175 billion in deposits, the biggest failure since 2008, warnings from November 2021.
- ^ “First–Citizens Bank & Trust Company, Raleigh, NC, to Assume All Deposits and Loans of Silicon Valley Bridge Bank, N.A., From the FDIC”. FDIC, March 26, 2023. The First Citizens deal, $72 billion of assets at a $16.5 billion discount, about $90 billion left in receivership, 17 branches reopening March 27, and the $20 billion estimated cost.
- ^ “Fed official: Bank rules under review in wake of SVB failure”. AP via Denver7, March 28, 2023. Barr's testimony on the $42 billion and $100 billion, the long-term Treasurys, and the $20 billion FDIC cost for SVB and Signature.