Hubris Upended Silicon Valley Bank

Hubris caught up with Silicon Valley Bank. It borrowed short and invested long, a banking 101 mistake. It lobbied lawmakers for relaxed capital requirements, and it relied on a relatively small number of customers.

I worked with tech companies in Silicon Valley for many years. Since its establishment in 1983, SVB had been an integral part of the region’s startup ecosystem, positioning itself as a “partner for the innovation economy.” It sought to differentiate itself from what it considered stodgy, risk-averse larger banks.

The influence of SVB was enormous. Its executives spoke at conferences, and the bank hosted many events for startups and their founders. Venture capital firms put their own money in SVB and encouraged their clients to do the same. Fortune 1000 tech companies also deposited large sums. SVB was the bank that represented their interests and understood the connection between big risks and big rewards.

SVB catered to the tech industry — startups, venture capitalists, Fortune 1000 firms.

The Timeline

That 40-year relationship abruptly ended this month.

• March 8. SVB sold $21 billion in assets for a $1.8 billion loss.
• March 9. Depositors withdrew $42 billion from SVB, leaving it with a $1 billion negative cash balance.
• March 10. Regulators took control of SVB, with the Federal Deposit Insurance Corporation as the receiver.

According to SVB, it had $209 billion in assets at the end of 2022. Over 90% of its deposits were uninsured — above the $250,000 FDIC limit — owing to the relatively small group of customers parking large sums of money.

To quell the panic that set in the weekend of March 11 and 12, Treasury Secretary Janet Yellen authorized the FDIC to guarantee all deposits held by SVB, including balances exceeding the $250,000 limit. By Monday, the FDIC had created a new bank — Silicon Valley Bank, N.A. — and depositors had access to all their funds, allowing them to meet payroll and other expenses. The money to support this comes from the FDIC.

SVB’s failure is the second-largest in U.S. history and the largest since the financial crisis of 2008. SVB was the nation’s 16th largest bank. The takeover put nearly $175 billion in customer deposits under the regulator’s control. SVB’s fall was followed on March 12 by the seizure of Signature Bank by the New York Department of Financial Services, which appointed the FDIC as the bank’s receiver. Signature Bank represents the third biggest bank failure in history.

Why Did SVB Fail?

A disproportionate share of the company’s capital was in longer-duration investments, including mortgage securities and bonds, funded by short-term deposits. As interest rates rose, the value of those investments fell while deposits remained accessible to account holders.

As the economy slowed, many tech firms burned through their cash and could not secure new funding. As rumors spread about SVB’s inability to cover withdrawals, VCs started removing their deposits from the bank and advising the firms they funded to do the same. VCs expressed their concerns in a very public way: posting to Twitter, prompting more depositors to withdraw their money. This caused the $42 billion one-day run on the bank.

In 2010, Congress passed the Dodd-Frank Act that subjected most banks to frequent “stress tests” and a minimum level of capital reserves. In 2018, Congress voted to weaken the reserves requirement of regional banks by upping the asset threshold from $50 billion to $250 billion — banks below $250 billion in assets were exempt from Dodd-Frank minimums.

The leadership of SVB lobbied heavily for the rollback even though it was not regional. It had branches nationwide and partnerships with banks worldwide. It courted technology companies from Europe and China. SVB had branches in China, Denmark, Germany, India, Israel, and Sweden.

SPD Silicon Valley Bank, SVB’s joint venture in China, was popular among Chinese startups because of access to U.S.-based investors. Opening an SVB account online required only a China-based mobile number for verification.

In the U.K., where SVB reportedly had invested in almost half of the country’s startups, the Bank of England placed SVB UK into insolvency. The government then sold SVB to another bank, HSBC, for £1.

Affected Companies

• Etsy, an SVB client, had to delay payments to some sellers before it was clear the FDIC would cover all deposits.

• Shopify halted payments to online sellers with Silicon Valley Bank accounts. It told merchants that they needed to move their accounts to another bank to receive funds. Shopify itself had an SVB account.

• Camp, a toy ecommerce startup, emailed customers on March 10, warning that the company had most of its cash assets with SVB. The retailer ran a 40% promotion on all merchandise over the weekend of March 11 to spur sales that would be deposited into another bank.

• The bankrupt crypto lender BlockFi had $227 million at SVB, according to a court filing.

• Payment automation platform Biil.com had about $670 million at Silicon Valley Bank.