Blast From The Past - Why Did Silicon Valley Bank Collapse?
Silicon Valley Bank's collapse in March 2023 was the result of a chain reaction that had been building for years:
The root cause: interest rate risk During the era of near-zero interest rates, SVB, like many other banks, plowed billions into US government bonds. That seemed safe at the time but when the Federal Reserve hiked interest rates aggressively to tame inflation, bond prices fell, eroding the value of SVB's bond portfolio. By the time of the collapse, that portfolio was yielding an average of just 1.79%, far below the roughly 3.9% yield on 10-year Treasuries.
Squeezed from the other side too Higher rates also raised borrowing costs for tech startups, forcing them to spend more on debt repayment while struggling to raise new venture funding which meant they had to draw down their SVB deposits to keep operating. So SVB was losing value on its assets and watching deposits drain out at the same time.
The spark that set off the run The actual panic began when SVB announced it had sold securities at a loss and would sell $2.25 billion in new shares to shore up its finances. That announcement set off panic among customers, who withdrew their money in large numbers, and the bank's stock plummeted 60% the next day, dragging other bank shares down with it.
The end Within 48 hours, trading in SVB's shares was halted, the bank abandoned efforts to raise capital or find a buyer, and California regulators shut it down, placing it into FDIC receivership which was the biggest US bank failure since the 2008 financial crisis.
Regulators moved fast afterward: the government guaranteed all SVB deposits to prevent further bank runs, though it wasn't a 2008-style bailout. Stock and bondholders weren't protected, and HSBC bought SVB's UK arm for just £1 to secure British depositors.
In short: a bank heavily concentrated in one sector (tech) made a big bet on low-rate bonds, got caught out when rates rose sharply, and then a single announcement triggered a classic bank run that finished it off in days.
Here is the story from a 2023 CNN article: https://www.cnn.com/2023/03/13/investing/silicon-valley-bank-collapse-explained
What to learn what happens when your bank fails and the FDIC takes it over? Watch the video below.
What would have happened if the government had not stepped in, in 2008 to bail out the banks?
Cascading bank failures. Lehman Brothers was allowed to fail (no bailout), and the resulting shock to confidence nearly froze global credit markets overnight. Most economists believe that without intervention afterward, several more major banks (Citigroup, Bank of America, AIG, possibly Morgan Stanley and Goldman Sachs) would likely have failed or needed emergency mergers, given how interconnected their exposures were.
A frozen credit system. Businesses rely on short-term credit (commercial paper, interbank lending) for routine operations like payroll. A full freeze which was already starting could have meant companies unable to fund basic operations, leading to mass layoffs and bankruptcies well beyond the financial sector.
A much deeper depression, not just a recession. Many economists, including Ben Bernanke (Fed Chair at the time) and later academic studies, argue the US came close to a repeat of the Great Depression-scale collapse. Unemployment, which peaked around 10% in the actual crisis, could plausibly have gone significantly higher.
AIG's collapse specifically would have been especially dangerous because it had written enormous volumes of credit default swaps insuring other institutions' assets. Its failure could have triggered a chain of counterparty failures across banks worldwide that held those insured assets.
There are some industries like the banking industry that are to big to fail and within the industry there are certain banks that are to big to fail.
