Silicon Valley Bank, 2023Start here

A bank that took no credit risk and failed anyway. Held-to-maturity accounting, a concentrated depositor base, and the first bank run conducted at the speed of a group chat.

What happened

• 2020–21 — deposits surge as its technology-sector clients raise enormous amounts of capital. The bank's balance sheet roughly triples in two years, far faster than it can lend the money out.
• 2021 — the surplus is invested in long-dated government-backed securities at the low yields then prevailing, and classified largely as held to maturity, so the accounts do not mark them to market.
• 2022 — policy rates rise rapidly. The market value of those securities falls sharply; the accounting value does not move, because held-to-maturity classification is designed not to.
• Late 2022 onwards — deposits shrink as client companies burn cash and can no longer raise more. The bank needs money it does not have in liquid form.
• 8 March 2023 — the bank sells a portion of its available-for-sale book at a large realised loss and announces a capital raise to plug the hole.
• 9 March 2023 — the announcement is read as an admission. Withdrawal requests reportedly reach tens of billions of dollars in a single day, coordinated through the same investor and founder networks that had supplied the deposits.
• 10 March 2023 — the bank is closed by regulators. Days later the authorities announce that all depositors will be made whole, and the episode spreads to other institutions with similar profiles.

The mechanism

• There was no credit problem. The securities were government-backed and would very likely have paid in full at maturity. The problem was that maturity was years away and the deposits were due immediately — a pure liquidity mismatch.
• Duration was the risk, and it was unhedged. A portfolio with, say, six years of duration loses roughly 6% of value per 1% rise in yields; rates rose several times that. The duration calculator makes the arithmetic immediate, and nothing about it was hidden or complex.
• Held-to-maturity accounting made the loss invisible in the headline numbers. It was disclosed in the notes, as required. Almost nobody read the notes until someone did, and then everybody did at once.
• The depositor base was the accelerant. A large majority of deposits exceeded insurance limits, and the depositors were concentrated in one industry, connected to each other, and advised by the same small group of investors. That is not a diversified funding base; it is one depositor wearing many names — the coverage calculator shows what uninsured concentration means.
• Speed was new. Historical bank runs were limited by queue length and branch hours. This one was limited by nothing.

What it teaches

• Safe assets are not a safe balance sheet. Credit risk and interest-rate risk are different risks, and holding assets with none of the first says nothing about the second.
• Accounting classification changes what is reported, not what is true. A held-to-maturity label is a statement of intent about the future. Intent survives right up until liquidity requires a sale, at which point the market value was always the real one.
• Funding concentration is a risk factor. Diversification applies to the liability side of a balance sheet exactly as it does to the asset side, and it is checked far less often.
• A liquidity problem and a solvency problem converge under stress. Being forced to sell long assets early converts a paper loss into a realised one, and the realisation is what makes the institution insolvent.
• Disclosure is not the same as being read. Everything necessary to see this was in public filings for more than a year — an instance of the pattern in how to read a market number.

Where else this pattern appears

• Any open-ended vehicle over long-dated assets: the promise of quick exit against assets that take time to realise.
• LDI in 2022 — the same year, the same rate move, a different mechanism: there the problem was collateral calls rather than deposits, and the outcome rhymed.
• Money market funds under stress, where the first movers are paid at par and the remaining holders own the residue.
• Any business funding long assets with short money, which is the definition of banking and the reason it is regulated.