The bank that knew everyone in Silicon Valley
Silicon Valley Bank was no ordinary bank: for decades it had been the go-to institution for tech startups and venture capital funds in the United States, at one point banking nearly half of all venture-backed technology and healthcare startups in the country. Its business model revolved largely around attracting the deposits those startups received after multimillion-dollar funding rounds.
During the 2020-2021 tech boom, with interest rates near zero and a flood of venture capital pouring into startups, SVB's deposits soared. The bank, looking to put that excess liquidity to work, invested a very significant portion in long-term US Treasury bonds and mortgage-backed securities, assets considered extremely safe in terms of default risk.
The risk nobody was watching: what happens to 'safe' bonds when rates rise
A Treasury bond is indeed very safe against the risk of the government failing to pay, but it isn't free of a different risk: if you buy a long-term bond with a low fixed interest rate, and market interest rates then rise sharply, the market value of that bond falls, because no one would pay the original price for an instrument yielding less than the new alternatives available. This is precisely the interest rate risk that fixed-income securities carry.
When the Federal Reserve raised interest rates more aggressively than in any other period of the past four decades throughout 2022, SVB's long-term bond portfolio lost a substantial share of its market value. As long as those losses remained only 'on paper' (without having to sell the bonds before maturity), the bank could keep operating normally. The problem would arrive if it were ever forced to sell them early.
36 hours: the fastest bank run of the modern era
on March 8, 2023, SVB announced it had sold part of its bond portfolio at a $1.8 billion loss, and that it needed to raise capital to shore up its balance sheet. Far from reassuring the market, the announcement confirmed its customers' worst fears: the bank had a real solvency problem, not just a temporary liquidity issue.
Since more than 90% of SVB's deposits exceeded the $250,000 limit insured by the FDIC (the US deposit insurance fund) in the event of failure, its corporate clients had a very strong incentive to withdraw their money immediately rather than wait and see. The news spread within hours through startup founders' WhatsApp groups and influential venture capitalists on social media, some of whom publicly advised their portfolio companies to pull their funds as soon as possible. On March 9, customers tried to withdraw $42 billion in a single day. Regulators seized the bank the next morning, March 10, 2023.
- March 8, 2023: SVB announces a loss-making bond sale and a capital raise.
- March 9, 2023: customers try to withdraw $42 billion in a single day.
- March 10, 2023: regulators seize the bank, barely 36 hours after the initial announcement.
The regulators' lightning response, very different from 2008
Unlike the slowness and hesitation that surrounded the Lehman Brothers case in 2008, US regulators acted with unusual speed: the same weekend as the seizure, the Federal Reserve, the Treasury, and the FDIC jointly announced they would guarantee all of SVB's deposits, including those above the legal $250,000 limit, to prevent panic from spreading to other US regional banks with similar customer profiles.
This decision, justified by the risk of systemic contagion to the regional banking sector, sparked intense debate over so-called 'moral hazard': if the government systematically guarantees even uninsured deposits whenever a bank fails, what incentive do large corporate depositors have to monitor their bank's actual solvency before entrusting it with their money?
The lesson: customer concentration can be as dangerous as asset concentration
SVB's collapse wasn't caused by fraudulent investments or exotic bets, but by a combination of poorly managed interest rate risk and an extraordinarily concentrated customer base (startups and venture capital funds, all connected to one another and capable of coordinating an almost instantaneous reaction). That concentration, which for years had been the bank's great competitive advantage, became its greatest vulnerability in a moment of crisis.
The case showed that, in the era of social media and digital banking, a bank run no longer needs physical queues like Northern Rock's in 2007: it can be completed in hours, with thousands of customers moving their money simultaneously from their phones, without ever setting foot in a branch.
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Frequently Asked Questions
Because it had invested a large share of its deposits in long-term bonds whose market value fell sharply as interest rates rose in 2022, and when it had to recognize those losses by selling part of the portfolio, it triggered a panic among customers that led to a bank run in under 36 hours.
Because its customer base (startups and venture capital funds) was tightly connected through social media and messaging groups, which let panic spread and thousands of customers withdraw their money digitally within hours, with no physical queues needed.
More than 90% of deposits exceeded the $250,000 limit insured by the FDIC. However, regulators decided to guarantee all deposits, including uninsured ones, to prevent contagion to other regional banks.
It's the risk that the market value of a long-term, fixed-rate bond falls when general interest rates rise, because that bond yields less than new alternatives available in the market, even if the bond's issuer carries no default risk at all.
It's the concern that, if the government systematically guarantees even uninsured deposits whenever a bank fails, large corporate depositors lose the incentive to monitor their bank's actual solvency before entrusting it with their money.