Regulators have long warned that the end of rock-bottom interest rates could cause sudden crises in unexpected corners of global finance. So when Silicon Valley Bank (SVB) failed in the face of a funding crunch, investors were left to wonder if its plight was a harbinger of broader trouble. Major banks are much better capitalized than they were before the global financial crisis, and SVB’s deposit base was unusually concentrated in venture-backed startups. But the selloff in bank shares that followed SVB’s woes reflected worries that the ripple effects of interest-rate hikes could hurt at least the most vulnerable lenders.


As the only publicly traded bank focused on Silicon Valley and new tech ventures, SVB was deeply embedded in the U.S. startup scene. According to its website, it did business with nearly half of all U.S. venture capital-backed startups and 44 per cent of U.S. venture-backed tech and health-care companies that went public last year. Its website lists Shopify, VC firm Andreessen Horowitz and cybersecurity firm CrowdStrike Holdings among its clients. On March 8, its parent company, SVB Financial Group, announced it had sold US$21 billion of securities from its portfolio at a loss of $1.8 billion and would sell $2.25 billion in new shares to shore up its finances. That unnerved a number of prominent venture capitalists, including Peter Thiel’s Founders Fund, Coatue Management and Union Square Ventures, which were said to have instructed their portfolio businesses to pull their cash from the bank. By March 10, the effort to raise new equity or find a buyer had been abandoned, and the bank was put into receivership by the Federal Deposit Insurance Corp.


The FDIC said that it had created a new bank, the Deposit Insurance National Bank of Santa Clara, to hold the assets of SVB. It said that insured depositors — those with $250,000 or less in their accounts — would have access to their money by March 13. Receivership typically means a bank’s deposits will be assumed by another healthy bank, or the FDIC will pay depositors up to the insured limit. Typically, the FDIC sells the assets of a failed bank to other financial institutions and pays those with uninsured deposits out of those proceeds. Uninsured depositors will get a receivership certificate for the remaining amount of their uninsured funds, the regulator said, adding that it doesn’t yet know that amount.


There’s no guarantee, but it’s possible. A transaction might involve selling the company’s assets piecemeal or as a whole, Bloomberg News reported, citing a person familiar with the matter who said the goal is to complete a deal by Monday. In the depths of the global financial crisis 15 years ago, U.S. regulators set a precedent by arranging the distressed sales of Bear Stearns Cos. and Merrill Lynch & Co. to JPMorgan Chase & Co. and Bank of America Corp., respectively. But those failed banks were considered systemically important because of their debt obligations to other banks; it’s not clear that SVB would get the same treatment.


Several factors came together to cause its distress. Some of those are unique to SVB, while others are the source of broader worries in banking. Behind most of them are the rapid interest-rate increases pushed through over the last year by the U.S. Federal Reserve to tame the highest inflation in decades. One consequence of those hikes that hit SVB especially hard was the sharp downturn in the high-flying tech companies that had been the source of its rapid growth; most banks have broader customer bases. As venture capital dried up, SVB’s clients tapped their deposits to withdraw cash they needed to keep going. 


To keep up with the wave of withdrawals, SVB had to sell assets — including, crucially, bonds that had lost a substantial portion of their value. That produced $1.8 billion in losses that wouldn’t have hit the bank’s balance sheet had the bonds been held to maturity. Here, too, SVB’s funding structure had made it particularly vulnerable. All US lenders park a chunk of their money in Treasuries and other bonds, and the Fed’s hikes made those existing bonds less valuable because of their low yields. But SVB took it to a different level: Its investment portfolio had swelled to more than half its total assets, far above the norm. 


For one thing, SVB’s problems coincided with the abrupt shutdown of Silvergate Capital Corp., though the two cases are mostly unrelated. At Silvergate, the issue was a run on deposits that began last year, when clients — cryptocurrency ventures, primarily — withdrew cash to weather the collapse of the FTX digital-asset exchange. But the withdrawals forced asset sales that locked in losses, as happened with SVB, leading Silvergate to announce plans to wind down operations and liquidate. Even before SVB’s woes became public, US bank stocks had come under pressure after KeyCorp warned about mounting pressure to reward savers: As interest rates rise, depositors can switch to banks offering higher rates. Analysts say that pressure hits regional banks hardest. They can either raise their own rates, cutting into profits, or face the prospect of a scramble to shore up their funding base if depositors leave.


Concern had been mounting about the impact of rising rates on bank balance sheets. While rising rates buoy banks’ revenue, in the short term they also force them to write down the value of assets they hold. In all, US banks had booked $620 billion in unrealized losses on their available-for-sale and held-to-maturity debts at the end of last year, according to filings with the FDIC. The agency noted in March that those paper losses “meaningfully reduced the reported equity capital of the banking industry.” As recently as January, SVB Chief Financial Officer Daniel Beck told investors there wasn’t “any desire” for a wholesale change in the bank’s available-for-sale portfolio. That all changed this month.