How Silicon Valley Bank Collapsed in 48 Hours

HOOK0:00 to 0:40

If you want to see how a modern bank run works, start with two numbers from Silicon Valley Bank. Examiners had found it could handle about $16 billion leaving in a day. But on Thursday, March 9th, 2023, customers asked for $42 billion in roughly eight hours. By that evening, a bank with more than $200 billion in assets had a cash balance below zero. Less than two days after one announcement, it was gone. So how does a bank that big run out of cash that fast? It lost a race between money leaving and cash coming in.

THE TRIGGER0:40 to 1:57

The starting gun was that announcement. On Wednesday, March 8th, SVB said it had sold $21 billion of its securities. The sale came with an after-tax loss of about $1.8 billion. In the same announcement, SVB said it wanted to raise $2.25 billion in new capital. That same day, a different bank, Silvergate, said it was winding down.

Now put yourself in the shoes of a startup finance chief with millions sitting at SVB, far more than insurance covers. You see the words loss and raising capital in the same announcement. The Federal Reserve's own review says that's how uninsured depositors read it, as a sign the bank was in financial distress.

California's regulator later wrote that SVB was in sound financial condition before March 9th. Either way, the $1.8 billion loss alone didn't sink it. The fear about what else was on its books did. Michael Barr, who oversaw the Fed's review, says the immediate cause was a liquidity run, but the underlying issue was concern about whether the bank was solvent. To see where that concern came from, look at its bonds.

THE BONDS1:57 to 4:09

Those bonds came out of SVB's best years. Between 2019 and 2021, the bank tripled in size, to over $211 billion in assets, as venture money poured into its startup customers and they parked it at SVB.

SVB didn't lend most of that out. By the end of 2022, 55% of its assets were securities, more than double the share at comparable large banks. And 78% of those securities were classed as held to maturity, nearly double the share at those same banks. Most of those held-to-maturity bonds wouldn't mature for ten years or more.

These were mostly mortgage bonds issued by government agencies. The Fed describes them as low risk from a credit perspective. But they carried rate risk. If you own a bond paying 1.79%, and new bonds start paying more, nobody will pay you full price for yours. And 1.79% is the average yield on the bonds SVB sold on March 8th.

When rates rose in 2022, the losses on those bonds piled up quickly. Held-to-maturity bonds sit on the books at what the bank paid, not what they would sell for today. So most of those losses never touched the balance sheet, though the bank still had to disclose them. And generally, a bank that sells some of its held-to-maturity bonds has to value all of them at market prices.

SVB also made its own position worse. In 2022 it removed interest rate hedges that would have protected it against rising rates. That April, it changed its assumptions about how long its deposits would stay, to get under a risk limit instead of reducing the risk. The Fed's report calls that change counterintuitive. In plain terms, the bank changed how it measured the risk, so the risk looked smaller than it was.

So the bonds were safe in the credit sense. What they couldn't do was turn into cash at full price on short notice.

CTA4:09 to 4:14

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WHY THESE DEPOSITORS RAN4:14 to 5:25

Not being able to raise cash fast only matters if a lot of depositors leave at once. SVB's depositors had more reason than most. Deposit insurance covered $250,000 per depositor, per bank. At the end of 2022, about 94% of SVB's deposits were uninsured, more than twice the share at comparable large banks.

Most of those depositors were startups and the venture firms that funded them, a tightly connected network. The Fed's review says that network, fueled by social media, pulled uninsured deposits in a coordinated way at a rate nobody had seen before.

California's regulator saw the same thing. After the March 8th announcement, social media and private message boards filled with talk of a run, and many of SVB's venture capital customers suggested companies take their money out.

Put that together and you get the logic of a run. If your money was uninsured and everyone in your network was leaving, the safe move looked like leaving first and asking questions later. On Thursday morning, the clock started.

THURSDAY, MARCH 9: THE RUN5:25 to 6:25

Within about eight hours on March 9th, SVB received withdrawal requests of roughly $42 billion. That was about a quarter of all its deposits. California's regulator says around $36 billion actually left. Another $6 billion was still waiting to be processed when the bank was closed.

Now hold that next to the examiners' number. Thursday's requests were more than two and a half times the $16 billion they said SVB could handle in a day.

That capacity was already generous by historical standards. The Fed's review puts Washington Mutual's run in 2008 at about $19 billion, spread over more than two weeks. SVB faced more than double Washington Mutual's total in one working day.

Speed made the difference. California's regulator points out that the first fully functional banking app launched in 2011, years after the last financial crisis. In 2023, moving millions took a few taps.

THE PLUMBING6:25 to 7:58

So here's the obvious question. At the end of 2022, SVB reported about $120 billion in investment securities. Even after selling $21 billion, most of that was still there. Why couldn't it use it?

Because bonds don't become cash instantly. Selling more of them meant locking in more losses. The other route was borrowing against them. A bank pledges its bonds as collateral, at the Federal Home Loan Bank or the Federal Reserve, and draws a line of credit.

SVB tried. California's regulator says SVB couldn't pledge collateral with either lender in time to get more credit that day. The Fed's review explains part of why. SVB hadn't tested its ability to borrow from the Fed in 2022, and it didn't have the right collateral and operational arrangements in place.

By the close of business on Thursday, SVB's cash balance was about $958 million below zero. California's regulator says the bank failed to make its cash letter payment to the Federal Reserve, and could no longer pay its obligations as they came due.

To be fair to the record, the Fed doesn't claim better preparation would have saved SVB. It says a stronger ability to get emergency funding probably wouldn't have prevented the failure, but could have made the wind-down more orderly. The bank hadn't run out of assets. It had run out of time.

FRIDAY, 8:39 A.M.7:58 to 8:50

And the forecast for Friday was worse. On Thursday evening and into Friday morning, SVB told supervisors it expected more than $100 billion in additional outflows on Friday. Together with Thursday, the Fed says that came to roughly 85% of the bank's deposit base.

Regulators worked through the night. At 8:39 a.m. Pacific time on Friday, California's regulator took possession of Silicon Valley Bank and named the FDIC as receiver. Insured deposits moved into a temporary bank the FDIC created. Money above the $250,000 line wasn't guaranteed. The FDIC said it would pay uninsured depositors an advance within a week, and maybe more later, as it sold the bank's assets. Over the weekend, the question became whether the run would spread to other banks.

SUNDAY, MARCH 12: THE PAYOFF8:50 to 10:21

On Sunday, March 12th, the Treasury, the Federal Reserve and the FDIC made a joint announcement. Every SVB depositor, insured or not, would be fully protected, with access to their money starting Monday. Signature Bank in New York, closed that same Sunday, got the same treatment.

The statement said no losses would be borne by taxpayers. Shareholders and certain unsecured debtholders weren't protected. Senior management was removed. Any losses to the deposit insurance fund from covering uninsured depositors would be recovered through a special charge on banks.

The Fed added a second piece. A new Bank Term Funding Program offered banks loans of up to one year against Treasuries and other qualifying bonds, with those bonds valued at par. Par means full face value, not the lower market price. The Fed said the program would remove a bank's need to quickly sell those securities in times of stress.

Look at what those two moves did. For depositors at SVB and Signature, the guarantee took away the reason to be first out the door. The funding program let a bank borrow against its bonds at face value instead of selling them at a loss. SVB went into Thursday with neither. Its customers could move money in a few taps, and the bank couldn't turn its bonds into cash before the day ran out.