The Silicon Valley bank run happened on March 10, 2023, when a number of venture capitalists and tech companies withdrew their money from the bank after it announced a huge loss and a plan to raise new capital. The bank failed to find a buyer or raise enough funds and was taken over by the FDIC. It was the second-largest bank failure in U.S. history and the largest since 2008.
The cause of the bank run was a combination of factors, including rising interest rates, a slump in tech stocks, a high concentration of deposits from startups and venture firms, and a lack of confidence in the bank’s management.
Some more details about the bank run are:
- The bank had more than $200 billion in assets and catered to tech startups, venture capital firms, and well-paid technology workers.
- The bank run caused a panic in the financial markets and a selloff in bank shares, despite assurances from President Biden that the banking system is safe.
- The FDIC created a new bank to hold the assets of SVB and said it would pay all depositors, both insured and uninsured, in full by March 13. It also removed the senior management of SVB and said it would recover any losses from a special assessment on banks.
- The FDIC also took over another troubled bank, Signature Bank, which was closed by its state chartering authority on March 12. It said it would pay all depositors of this bank as well.
The responsibility for the bank run is not clear yet, but President Biden said he is committed to holding those responsible fully accountable and to strengthening oversight and regulation of larger banks. Some possible factors that contributed to the bank run are:
- The bank’s management, which made risky investments and failed to raise enough capital or find a buyer in time.
- The venture capitalists and tech companies, which withdrew their money from the bank en masse and triggered a panic .
- The regulators, who may have overlooked some warning signs or loopholes in the bank’s operations3.
According to some sources, the risky investments that SVB made were:
- US treasuries and mortgage-backed securities, which lost value as interest rates rose.
- Loans to tech startups and venture capital firms, which exposed the bank to high default risk and volatility.
- Crypto-related assets and services, which faced regulatory uncertainty and market fluctuations.
According to a letter that SVB sent to its shareholders on March 9, 2023, the bank lost $1.8 billion on the sale of US treasuries and mortgage-backed securities. The bank did not disclose how much it lost on its loans to tech startups and venture capital firms, or on its crypto-related assets and services. However, some analysts estimate that the bank’s total losses could be as high as $5 billion.
SVB sold its US treasuries and mortgage-backed securities because it needed to raise cash to meet the withdrawal demands of its depositors and to fund new lending. The bank also faced regulatory pressure to reduce its exposure to these securities, which had become less attractive as interest rates rose. However, by selling these securities at a loss, the bank eroded its capital base and triggered more panic among its customers.
SVB’s customers withdrew their money for various reasons, such as:
- They needed cash to pay their expenses or fund their projects, as venture capital funding slowed down and tech stocks slumped.
- They lost confidence in the bank’s management and financial stability, especially after it announced its huge loss and capital raising plan.
- They feared that their deposits would not be fully insured or protected by the government, despite assurances from regulators.