case study of silicon valley bank

Case Study: The Collapse of Silicon Valley Bank and Its Global Impact

“The downfall of SVB has left investors and depositors scrambling, as the domino effect threatens the stability of the global financial system.”

Introduction

The Silicon Valley Bank (SVB) is one of the leading U.S. banks in the fintech space, and its collapse has created an aftershock effect throughout the global financial system. Investors and depositors have uncertainties about the situation as the Federal Deposit Insurance Corporation (FDIC) intervenes to take control of the bank in question. In this article, we will analyze the international impact of SVB’s downfall on depositors, the financial markets, cryptocurrencies, and other banks.

‍‍Why Does It Matter?

As Emil Åkesson, Chairman and President of CLC & Partners, stated in  his article on nasdaq.com , “ If things are bad in the U.S., things are bad all over. ” If the SVB issue is not addressed properly, it can lead to greater global problems with a domino effect.

Silicon Valley Bank is distinguished as being a strong stakeholder that serves tech startups, life science and healthcare companies, private equity firms, and venture capital funds. SVB stands out holding the 16th position amongst the largest banks in the U.S. with 4,100+ banks operating all over the country. Its collapse has sent shockwaves throughout the global markets and also raised concerns about the future of fintech, technology startups, and innovation in the U.S. economy.

Before its breakdown, SVB’s holdings and assets were valued around at $210 billion, with $175 billion in deposits. Although this may seem like a small fraction of the total U.S. bank deposits of $18 trillion, it’s important to note that nearly $6 trillion of those deposits are held in small banks. In addition, SVB falls into the category of large banks, with its size and efficacy in the fintech industry being significant factors. In fact, this is the largest bank failure in the U.S. since 2008 Washington Mutual Bank failure.

The impact of SVB’s breakdown extends beyond its immediate clients. As the primary financial supporter of technology startups and venture capital funds, SVB’s failure could hinder the growth and development of future tech giants like Apple, Google, and Tesla in their early days. These startups rely on funding from various sources, especially venture capital firms. SVB plays a critical and central role in this ecosystem by providing commercial banking services to these companies and funds, fueling the technological innovation that has made the U.S. a global powerhouse. Therefore, it is essential for the U.S. to serve a safe and sound banking system to secure its position in the technology race.

Approximately, 29% of SVB’s deposits belong to technology startups and companies, potentially putting the next generation of industry-disrupting ideas at risk. The collapse of SVB is not only a financial crisis but also a potential innovation catastrophe. As these tech startups and venture capital funds search for new banking partners and possible financing opportunities, the U.S. must address the reverberations of SVB’s breakdown to preserve its status as a leader in innovation and prevent a possible slowdown in the growth of its tech sector.

‍‍How Did SVB Get Here?

We can trace the roots of SVB’s collapse back to 2022, when the U.S. raised interest rates to combat inflation, successfully lowering the inflation from 9% to 6% and aiming to further reduce it to  4%. As interest rates increased, the availability of capital diminished. SVB and similar banks had been providing cash flow to startups, with investors channeling their money into venture capital funds to support these projects. The startups would then use the funds to grow and eventually repay their debts. If these startups succeeded, the venture capital funds would generate substantial returns for their investors, despite the high risk.

However, the interest rates started to rise in 2022, and investors shifted their attention to low-risk deposits and bonds with higher yields which led to difficulties for venture capital funds in raising capital. Consequently, startups encountered challenges in securing funds and even struggled to pay their employees’ salaries. With the decrease in fundraising traffic, startups had to dip into their SVB bank accounts to cover these expenses, causing SVB’s total deposits to shrink. Simultaneously, SVB’s investments and shares in these sectors suffered as the startups and tech companies could no longer grow.

SVB held the top position in the Q4 of 2022 with 55.4% of their total funds invested. The bank’s deposit funding predominantly consisted of early tech startups and tech companies, providing them with fundraising by acquiring shares and receiving interest payments in return. Both investors and companies held their money in SVB, which the bank then used to make risky investments in more startups. However, with an investment-to-holding ratio of over 55%, SVB’s exposure was a very high and unorthodox one.

Ultimately, SVB failed to accurately assess the risks associated with their investments in these startups given rising interest rates. While it may not be fair to label this approach as inherently flawed, the uncontrolled inflation rate necessitated an increase in the interest rates, which proved to be the tipping point. In the end, SVB found itself unable to repay the $175 billion in deposits. The following day, SVB experienced a bank run and panicked customers withdrew $42 billion from SVB. To cover the shortfall, the bank attempted to sell its shares in tech startups and companies which led to a significant drop in their value and intensified the crisis.

The Bond Backlash

A sudden surge in interest rates can create a chain of events that sends shockwaves throughout the financial landscape, shaking the very foundation of previously issued bonds. The allure of new bonds, offering higher returns in the wake of rising interest rates, leads investors to flee for safer havens with high returns, outshining the older bonds with lower yields. As a result, bondholders seeking to sell their older bonds must reduce the prices to compete with the more appealing new bonds and this eventually leads to a capital loss.

Banks generally tend to have big holdings of government bonds that they can easily liquidate in times of crisis. Unfortunately, SVB had made considerable investments in long-term bonds when the interest rates were much lower than they are now. When the U.S. aggressively raised interest rates by 4.5%, the market value of SVB’s older long-term bonds experienced a sharp decline. This situation resulted in a $1.8 billion loss in the market value of their bond investment for SVB. These consecutive events dealt a double blow to the bank, ultimately contributing to SVB’s collapse.

The FDIC and Depositor Insurance

In the United States, the deposits are insured up to at least $250,000 per depositor in the FDIC-insured banks providing a safety net for depositors in case of bank failures. However, this limit has become a discussion topic with the SVB case.

SVB’s Q4 2022 data revealed that only 2.7% of its account holders had deposits below $250,000, which means 97.3% of the depositors had uninsured amounts exceeding the FDIC limit. These uninsured deposits are at risk of being lost, amounting to over $150 billion.

• The Existentialists : People made their own decisions and therefore should face the consequences of their own choices.
• The Concerned : If the FDIC and the government don’t intervene, it could lead to a much bigger financial crisis, affecting everyone on a global scale.

SVB, Stocks, and Commodities

SVB’s collapse has had a significant impact on global markets, with financial stocks losing $465 billion in market value in just two days. Gold prices have rallied by up to 10% as investors were seeking a safe haven. With this incident, the U.S. might have failed to fight inflation, at least for a while.

SVB and Cryptocurrencies

The collapse of SVB have had a notable impact on cryptocurrencies, particularly Bitcoin and Ethereum being the safe haven of the crypto market, which have surged in value following the bank’s downfall. Around $100 billion has moved to the crypto market in the following week, making Bitcoin, Ethereum, and altcoins such as Solana and Cardano reach new heights. Investors have been driven away from traditional banking towards the decentralised, leading to Bitcoin reaching a nine-month high.

However, every silver lining has a cloud. USDC, a stablecoin pegged to the U.S. dollar and managed by Circle, serves as a reliable medium of exchange without the volatility of other cryptocurrencies. Circle maintains a one-to-one reserve, holding one dollar for each USDC issued. Of the $40 billion raised from users, Circle invested $32 billion in short-term U.S. government bonds, securing 77% of the funds. The remaining 23%, or $3.3 billion, was held in cash, leaving 8% of USDC’s backing at risk. As a result, the theoretical value of 1 USDC should have dropped to $0.92 at the moment, casting a shadow over the stability of stablecoins.

Following the SVB news, Circle’s delayed response caused USDC’s value to plummet to the $0.8 range. Eventually, Circle announced that they had anticipated the situation and requested SVB to return the funds. U.S. regulators intervened, and USDC’s value returned to normal levels.

Circle has also stated that they are also committed to compensating for any losses if they cannot recover the funds from SVB. While this may not be a significant challenge for Circle, as they earn approximately $1.6 billion in interest annually from their bond investments, the primary issue was their delayed statement. However, Circle should have made this statement earlier to prevent panic selling and financial loss for USDC holders.

Why Blockchain Technology Shines?

While all of these were happening, some of the C-levels of the SVB were selling their shares. Gregory W. Becker, CEO of SVB, sold 11% of his shares on 27th February. Some of them started to sell their shares even more than a month ago starting at the beginning of February. Even though it was publicly available, nobody can blame individuals in a situation where the government itself couldn’t foresee and prevent this from happening. On a legal level, there seems no problem with this, but in terms of ethics, it does not look good, and Greg Becker may have a hard time finding support.

The SVB collapse highlights the advantages of blockchain technology, which offers transparency and traceability. In a centralized banking system, individuals must trust the bank, and tracing transactions can be difficult even for governments. With blockchain, all transactions are transparent and immutable, and warning systems such as Blocknative can be put in place for significant withdrawals like the SVB scandal. If this had occurred on a blockchain-based platform, investors could have been warned earlier when the bank’s C-level executives sold their shares. Unfortunately, the fintech industry has failed in educating the public about these warning system benefits. This highlights the need for improved communication and transparency in the financial industry and as CLC & Partners, we are committed to informing our audience.

The 3S Trio: Silvergate, SVB, and Signature Bank

Silvergate Capital, SVB, and Signature Bank, all facing financial issues, have caused turmoil in the crypto-friendly banking space. The closures of these banks, coupled with regulatory and legal investigations, have made it difficult for crypto companies to rely on traditional banking partners.

What’s Next for SVB and Its Depositors?

A consortium of private equity firms led by The Bank of London has submitted formal proposals to His Majesty’s Treasury to acquire SVB, but it remains uncertain whether the U.S. government will allow such a move due to potential privacy concerns.

U.S. Treasury Secretary Janet Yellen has announced that there will be no bailout for SVB. However, Yellen and the FDIC declared that additional funding will be made available to ensure all deposits will be paid in full regardless of the amount. The Fed also plans to provide funding to eligible depository institutions to support depositor needs. It should be noted that this issue should be solved very carefully to avoid providing freedom and relief to the other banks in the U.S. in terms of taking relentless risks with such a remedy.

All in all, the dramatic downfall of Silicon Valley Bank has left far-reaching consequences, affecting investors, depositors, and the global financial system. While the FDIC and the government are stepping in to prevent a total meltdown, it’s essential to monitor the situation closely and learn from this crisis to better prepare for future financial disruptions. As our chairman and president Emil Åkesson says, “history repeats itself, again,” and it will sure do again. A detailed case study like this article will definitely help us to extract valuable lessons to safeguard against future economic disruptions.

The financial world needs a leap forward, and we at  CLC & Partners  are eager to provide our community with our team’s valuable insights and extensive experiences to help you stay ahead of the curve. Follow  CLC Blog  to stay tuned and with truth!

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From hero to zero – the case of silicon valley bank.

The sudden collapse of Silicon Valley Bank (SVB) surprised many investors and industry experts, given the bank’s recent accolades and long-standing reputation as one of the best national and regional banks in the U.S. [1] Moreover, there had been no reported bank failures during the COVID-19 pandemic from 2020 to 2022. As the second-largest bank failure in U.S. history, the collapse of SVB has raised many questions about what went wrong and how such a successful institution could fail so unexpectedly.

Banks fail for a variety of reasons, including weak regulation, economic instability, poor corporate governance, and inadequate risk management. Following the 2008 financial crisis, the number of bank failures in the United States increased significantly. In 2010, there were 157 failures, the highest number since the savings and loan crisis of the 1980s and early 1990s. However, since then, the number has steadily declined. One possible reason is the regulatory reforms that were implemented after the financial crisis The Dodd-Frank Wall Street Reform and Consumer Protection Act, for example, introduced new regulations to increase capital and liquidity requirements for banks, as well as to enhance risk management practices. Additionally, the overall improvement of the economy and the banking industry’s recovery from the financial crisis have contributed to the decline in bank collapses.

In a recent paper , we investigate the collapse of SVB, analyzing the bank’s financial performance in the period 2019-2022. We show that the bank expanded significantly during that period, with total assets and total deposits tripling and total revenue and net income growing more than two-fold. However, the bank’s financial performance declined during the same period. For example, the average yield on earning assets declined from 3.83 percent in 2019 to 2.77 percent  in 2022, which was lower than for its peers. In contrast, the cost of funding earning assets increased from 0.30 percent to 0.55 percent, which was higher than for its peers. Consequently, both return on assets and return on equity decreased during the period.

An analysis of the bank’s balance sheet also reveals some important points. First, the bank’s equity capital ratio was 7.39 percent in 2022, significantly lower than its peers’ ratio of 9.34 percent. Second, the bank’s proportion of loans and leases to total assets dropped from 46.95 percent in 2019 to 35.22 percent in 2022, which was significantly lower than the industry average of 50.98 percent. In contrast, the total debt securities ratio increased from 39.68 percent to 56.12 percent. Third, SVB mainly depended on deposits to finance its assets. Although the deposit-to-total assets ratio decreased from 89.99 percent to 83.90 percent, it was still significantly higher than its peers’ ratio of 81.42 percent. Moreover, more than 94 percent of its deposits were uninsured.

A more detailed analysis of the bank’s financial statements uncovers that in 2021, when interest rates were very low, the bank invested more in debt securities, which accounted for 60.07 percent of total assets. The held-to-maturity (HTM) securities grew six-fold from 2019 to 2021, comprising 47.08 percent of total assets, while the available-for-sale (AFS) securities doubled during this period. At the end of 2021, the weighted average duration of its debt securities was 3.97 years. This figure increased to 5.7 years at the end of 2022, while the weighted average duration of the HTM securities was 6.2 years.

In early 2022, interest rates experienced a significant surge. For example, the yield on three-year Treasury Notes increased significantly from less than 1 percent at the end of 2021 to around 4.20 percent at the end of 2022. As a result of the interest rate hike, SVB was exposed to the risk of unrealized losses of at least $15.76 billion (equivalent to 12.61 percent of its $125 billion debt securities). This could have resulted in a negative market value of the bank’s equity capital by the end of the year. However, since the bank did not sell its securities, most of these potential losses were not realized.

Another weakness of SVB was the lack of diversification in its depositor base, as 89.38 percent of total deposits come from a small group of depositors primarily operating in the venture capital industry. Given the concentration of depositors, there was a higher likelihood that they knew each other. In the event of poor bank performance, there was a greater possibility that many depositors would withdraw their deposits at the same time because most of these deposits were uninsured, thus increasing the risk of a bank run.

The collapse of Silicon Valley Bank can, therefore, be attributed to several factors. First, SVB invested significantly in debt securities during a low-interest-rate period and did not properly hedge its risks, which resulted in losses after the recent surge in interest rates. Second, SVB had a highly concentrated depositor base, with a small group of depositors providing most of the bank’s funding, and a high proportion of uninsured deposits, increasing the risk of a bank run. Finally, SVB had significantly less equity capital than its peers, which further exacerbated the bank’s risk.

[1] Just a few weeks before SVB’s failure, it was named by Forbes as one of the best American banks based on its impressive growth, credit quality, and profitability.

This post comes to us from professors Lai Van Vo at Western Connecticut State University and Huong Thi Thu Le at Northeastern Illinois University. It is based on their recent article “From Hero to Zero – The Case of Silicon Valley Bank,” available here.

Kellogg School of Management at Northwestern University

Finance & Accounting Mar 16, 2023

What went wrong at silicon valley bank, and how can it be avoided next time a new analysis sheds light on vulnerabilities within the u.s. banking industry..

Erica Xuewei Jiang

Gregor Matvos

Tomasz Piskorski

Yevgenia Nayberg

Silicon Valley Bank’s sudden collapse has left finance professionals, economists, and even the Justice Department grappling with where to place blame for the bank’s failure and how to prevent the next bank collapse.

One significant question: Was Silicon Valley Bank an outlier, or are a lot of other U.S. banks similarly vulnerable to a bank run? Gregor Matvos, a finance professor at Kellogg, and his colleagues Erica Xuewei Jiang, Tomasz Piskorski, and Amit Seru, recently conducted an analysis that shows the banking sector is more fragile than we might hope.

Kellogg Insight spoke with Matvos about the bank run, his analysis, and what this could mean going forward. Our interview has been edited for length and clarity.

INSIGHT: Beyond the obvious—too many depositors all got spooked and tried to move their money at once—what happened here? What was the underlying cause?

Gregor MATVOS: In the last year or so, the Federal Reserve increased interest rates, which led to a decline in the value of the holdings of banks, the “asset side” of banks, as we call it. The loans they had made, the bonds they held, decreased in value.

INSIGHT: And why is that?

MATVOS: Well, think of it this way. You buy a government treasury bond two years ago when interest rates are close to zero that will repay over 20 years. Then the government starts issuing new bonds with interest rates at four percent. Obviously, you’d rather have four percent than zero percent. That seems like a no-brainer. Well, if the four percent bond right now costs you $1 to buy, then the bond you bought in the past surely is not worth a dollar anymore. It’s worth less because it’s giving you less interest payments over time. In other words, it declines in value. And the issue for banks is that not only have their securities lost value, but they also didn’t record these losses on the books. They pretended as though the value of these securities was the same as from the time when they issued them.

INSIGHT: Is that allowed?

MATVOS: Recognizing losses in a mark-to-market way has always been a little bit fraught with banks. The recognition of losses tends to be slow. Sometimes that’s okay; sometimes that’s not okay. The interesting question here is that the losses are quite substantial. So, uninsured depositors started getting worried. Imagine I’m one uninsured depositor, and I say, “Well, if all people like me pull out their money, is there going to be enough money left for me?”

Once people started worrying about there not being enough money, well, there may in fact not be enough money, and it makes sense to run. And that’s partly what happened to Silicon Valley Bank.

Now, what was especially interesting about Silicon Valley Bank is that its depositors were a tight-knit community in which the news of potential demise spread even faster than it normally would.

INSIGHT: So was there a specific trigger or did somebody just out of the blue say, “Hey, I think there’s a problem,” and then go tell their 50 best friends?

MATVOS: It’s always very hard to put your finger on a trigger. It was clear that banks were in slightly worse condition. Rumors started swirling, and then enough depositors redeemed that Silicon Valley Bank said, “We had to sell $20 billion of our bonds at a loss.”

I think that was actually a misstatement. They didn’t sell them at a loss, they sold them at market price. They just now finally had to acknowledge that the assets had lost value, which prior to that they had not done.

INSIGHT: Let’s talk about all these uninsured deposits. This would be any deposit over $250,000. So is the ideal scenario, then, for firms to just have 50 bank accounts so none go over $250,000?

MATVOS: Well, you want to think a little bit about who would have an uninsured deposit account, right? It could be a depositor who hasn’t really paid attention to where their salary is going, and more than $250,000 accumulates. Let’s call them “sleepy individual investors.” They quickly can readjust, and maybe send money to two banks or put money in Treasuries. For them, the deposits are a way of saving.

Another set of uninsured depositors would be something like charities or small businesses: You have to make payroll. It’ll be quite inconvenient to have your payroll spread across 50 banks. So you have one account with one bank, and you run your payroll through there, and you probably get your loan through there, and all the other services. It’s super convenient, and most of the time you really don’t have to worry about it. So we shouldn’t be that surprised that there’s uninsured deposits, because it’s practical for small businesses, charities, and so on to keep more than $250,000 in one place.

[SVB’s] still an outlier, but there are plenty of other banks, 186 to be precise, that sure look like they could be subject to a run. — Gregor Matvos

And if the banks have a big enough equity cushion—imagine that Silicon Valley Bank had been funded 20 percent through equity instead of 10 percent through equity—you can lose a lot of value and still not worry about deposits ever being impaired. But U.S. banks don’t do that. U.S. banks have more like 10 percent equity funding. That means that if asset values do decline, then all of a sudden, there’s a problem.

INSIGHT: In your analysis, you looked at whether Silicon Valley Bank is a complete outlier or emblematic of something broader. Can you tell us a little bit about your analysis?

MATVOS: We looked at data from all banks in the U.S. We first asked: These hidden losses, are they big? Are they small? Is Silicon Valley an exception? And we found that for the average U.S. bank, losses haven’t been mark-to-market on the order of 10 percent of their assets, which is substantial if you think that equity is about 10 percent of the assets.

So we said, okay, suppose Silicon Valley Bank defaulted just because of losses. How many other banks would default? Well, we find many would. In other words, Silicon Valley Bank wasn’t a particularly big outlier on asset losses.

It also wasn’t an outlier from the perspective of how much equity capital it had. Where it was really an outlier was in “uninsured leverage.” In other words, when it funded itself, it funded itself a lot with uninsured deposits. So it was a combination of losses and uninsured deposits that triggered a run. If you just had losses and not uninsured deposits, you’d probably be fine. If you just had uninsured deposits and no losses—which was pretty much the case for Silicon Valley Bank two years ago—you’d be fine. But having both losses and many uninsured deposits, well, they were not fine.

INSIGHT: You also looked at how many banks—through a combination of the above factors—would be vulnerable to a bank run. What did you find?

MATVOS: The way we try to evaluate who would be at risk of a run is we said, “Imagine that half of these uninsured depositors wake up and freak out. Like, ‘Oh my God, I don’t know what’s going to happen. Maybe I should pull out my money.’ And then you have to repay them. Is there enough money to repay the insured depositors so that FDIC won’t have to step in?” And we find that there are about 190 banks for whom if half the people ran, the bank would get shut down, and the other people who didn’t run would lose everything. So the incentives to run there would be enormous.

Now the FDIC should generally only protect insured deposits, which is why we factored that into our analysis. It now seems, because of the issues in the banking sector, that the government will guarantee all deposits. So there is no reason to run, because the FDIC will stand behind all deposits.

INSIGHT: So to recap, Silicon Valley Bank is pretty unique because it’s catering to these large Silicon Valley companies and is largely funded via uninsured deposits. But when you look holistically at its vulnerability to a bank run, it’s actually not as much of an outlier as we would want.

MATVOS: It’s still an outlier, but there are plenty of other banks, 186 to be precise, that sure look like they could be subject to a run.

INSIGHT: So that’s about five percent of the banks in America.

MATVOS: Yes. And we were trying to be fairly conservative. So, for example, we assumed that if people ran on the bank, you could sell the assets at zero discount, which we know doesn’t happen. But we said, okay, let’s try to give the banks a good shot.

INSIGHT: I want to zoom out to the big picture here. How did Silicon Valley Bank let this happen? Did they not understand that this was a possibility?

MATVOS: It’s a great question. What could Silicon Valley Bank have done to prevent this? They could have bought interest-rate insurance a couple of years ago. Had they done that, they would’ve been insured.

Or they could have held very short maturity securities. But then they wouldn’t have made very much money. Part of their issue specifically is they didn’t have tremendous lending opportunities: Their clients had too much liquidity. They had to park it somewhere, and they parked it with Silicon Valley Bank. And then the bank just invested in treasuries to earn something rather than completely zero.

But the broader issue is that banks are exposed to fluctuations in their asset values. If banks are very well capitalized, we don’t have the issue that we’ve just seen in the banking sector. For example, in some related work, we looked at the capitalization of financial intermediaries called “shadow banks” that offer a lot of loans in the U.S. but can’t take deposits. We found that these are funded with about 20 percent capital instead of 10 percent for banks. They have quite a lot of capital because they have no fallbacks. If U.S. banks had more capital, we wouldn’t be having this discussion right now.

INSIGHT: Are you envisioning a scenario where different banks with different business models or types of depositors should be held to different capital levels?

MATVOS: No, I think they should all be held to a higher capital level!

Look, of course we can go back to the drawing board, and we can keep trying to rewrite regulations, and maybe we can come up with something sensible. But U.S. history is littered with trying to write better regulations for financial intermediaries. And then in 2008, we realized house prices matter. And now in 2023, we realize interest rates matter, again, even though in the 1980s interest rates drove a third of the savings and loan industry—which is also banks—into default.

I’d probably sleep a little bit better at night as a taxpayer if capital requirements were higher. It just provides you a cushion if we get regulation wrong.

INSIGHT: What other long-term takeaways are you struck by in this particular incident?

MATVOS: That it’s hard to regulate banks! Banks provide a lot of really useful services. We need banks in our economy to move money from people who have too much of it—we call them savers—to people who drive our economy—borrowers. That could be consumers; that could be firms. So we need banking to operate well. It’s not like the financial industry isn’t already very heavily regulated. Medicine and finance are two of the most regulated industries in the U.S. The question is, can we come up with better regulation? Or should we just say that there’s an easier fix: if you want to take deposits, you need a little bit more capital. By a little bit, I mean five percentage points more, which banks consider quite a lot.

Howard Berolzheimer Professor in Finance

Jessica Love is editor in chief of Kellogg Insight .

Jiang, Erica Xuewei, Gregor Matvos, Tomasz Piskorski, Amit Seru. “Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?” 2023. Available at SSRN.

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The Sudden Implosion of Silicon Valley Bank

By: George Yiorgos Allayannis, Aldo Sesia

On March 10, 2023, Silicon Valley Bank (SVB) went into receivership. At the time, it was the second-largest US bank failure in history. What happened? The case briefly describes the story of SVB,…

• Length: 32 page(s)
• Publication Date: Oct 31, 2023
• Discipline: Finance
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On March 10, 2023, Silicon Valley Bank (SVB) went into receivership. At the time, it was the second-largest US bank failure in history. What happened? The case briefly describes the story of SVB, from its origin in the early 1980s to March 2023, and focuses on the events surrounding its demise. The case discusses in detail the issues that led to SVB's bankruptcy, in particular interest-rate risk, asset-liability management (ALM), inadequate stress testing, risk management more broadly, corporate governance, regulation, issues related to the bank's focus on venture capital (VC) and private equity (PE) loans, and its exposure to the technology sector. The case also describes the Fed's reaction after the bankruptcy. The SVB episode offers an important learning opportunity that touches many facets of a bank and its environment. It has several clear messages about bank management leadership. The case is well suited for a course on financial institutions, money and banking, and risk management. Ideally it would be positioned after credit, interest-rate, and liquidity risks have been covered, so that students have a better understanding of these concepts before they tackle this case; it could also be used as an introduction to the banking model, its key risks, and the role of the Federal Reserve. At Darden, it is taught in the second-year elective, "Financial Institutions and Markets."

Learning Objectives

The key objectives of the case are as follows: (1) understanding what went wrong with SVB, (2) exploring risk management (interest-rate and liquidity) issues faced by SVB, (3) examining asset-liability management themes present at SVB, (4) discussing corporate governance issues at a bank, (5) discussing SVB's focus on tech and its implications, and (6) contemplating new risks arising from social media.

Oct 31, 2023

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Financial service sector

Darden School of Business

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What Silicon Valley Bank Did Right

• Lou Shipley

It became a fixture among startups because it understood their needs better than other banks.

There’s a reason Silicon Valley Bank became such a fixture among startups: it understood their needs better than any other bank. Even now, many banks don’t have the flexibility and understanding to make banking easy for startups. With SVB gone, a lot of young companies will find it harder to manage their finances.

In the wake of the current wave of bank failures, one of the startups I currently work with — a Silicon Valley Bank (SVB) customer — recently applied to open an account with a major money center bank. The bank came back with a long list of objections and ultimately declined to open even a basic banking account. Reasons given were: the startup was not 100% U.S. owned, had a foreign-born CEO, and had a senior manager residing outside the U.S. The startup was denied even though it is very well capitalized with a CEO residing in the U.S., has many large U.S. customers,  and has a very promising future.  

• Lou Shipley is a Senior Lecturer in Entrepreneurial Management at Harvard Business School. He serves on the boards of six early-stage technology companies.

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Banking Turmoil: What We Know

Regulators trying to stem panic among customers shut down Silicon Valley Bank and Signature Bank within days.

By Vivian Giang

On Friday, Silicon Valley Bank , a lender to some of the biggest names in the technology world, became the largest bank to fail since the 2008 financial crisis . By Sunday night, regulators had abruptly shut down Signature Bank to prevent a crisis in the broader banking system. The banks’ swift closures have sent shock waves through the tech industry, Washington and Wall Street.

Here’s what we know so far about this developing story.

Why did Silicon Valley Bank fail?

Silicon Valley Bank provided banking services to nearly half the country’s venture capital-backed technology and life-science companies, according to its website, and to more than 2,500 venture capital firms.

For decades, Silicon Valley Bank, flush with cash from high-flying start-ups, did what most of its rivals do: It kept a small chunk of its deposits in cash, and it used the rest to buy long-term debt like Treasury bonds. Those investments promised steady, modest returns when interest rates remained low. But they were, it turned out, shortsighted. The bank hadn’t considered what was happening in the broader economy, which was overheated after more than a year of pandemic stimulus.

This meant that Silicon Valley Bank was left in the lurch when the Federal Reserve, looking to combat rapid inflation, started raising interest rates. Those once-safe investments looked a lot less attractive as newer government bonds kicked off more interest.

But not all of Silicon Valley Bank’s problems are linked to rising interest rates. The bank was unique in ways that contributed to its rapid demise. Because the bank’s business was concentrated in the tech industry, Silicon Valley Bank started to see trouble when start-up funding began to dwindle, leading its clients — a mixture of technology start-ups and their executives — to tap their accounts more. The bank also had a significant number of big, uninsured depositors — the kind of investors who tend to withdraw their money during signs of turbulence. To fulfill its customers’ requests, the bank had to sell some of its investments at a steep discount.

Once Silicon Valley revealed its huge loss on Wednesday, the tech industry panicked, and start-ups rushed to pull out their money, resulting in a bank run.

By late last week, Silicon Valley Bank was in free fall. The Federal Deposit Insurance Corporation announced on Friday that it would take over the 40-year-old institution, after the bank and its financial advisers had tried — and failed — to find a buyer to step in. The takeover put about $175 billion in customer deposits under the control of the federal regulator.

The F.D.I.C., created by Congress in 1933 to provide consumer deposit insurance to banks, is responsible for maintaining “stability and public confidence in the nation’s financial system,” according to its website.

The failure of Silicon Valley Bank, based in Santa Clara, Calif., is the largest since the 2008 financial crisis. In the aftermath of that crisis, Congress passed the Dodd-Frank financial-regulatory package, intended to prevent such collapses.

In 2018, President Donald J. Trump signed a bill that reduced how often regional banks had to submit to stress tests by the Federal Reserve. Last week, as news of Silicon Valley Bank’s failure spread, some banking experts said the Dodd-Frank package might have forced the bank to better handle its interest rate risks had it not been rolled back.

Why did Signature Bank fail?

Two days after the F.D.I.C. took control of Silicon Valley Bank, New York regulators abruptly closed Signature Bank on Sunday to stymie risk in the broader financial system.

Signature Bank, which provided lending services for law firms and real estate companies, had deposits of less than $100 billion across 40 branches in the country. The bank’s clients included some people associated with the Trump Organization, Mr. Trump’s company. In 2018, the 24-year-old bank began taking deposits of crypto assets — a fateful decision after the industry’s bottom fell out after the collapse of the FTX cryptocurrency exchange.

Like Silicon Valley Bank’s clients, most of Signature bank’s customers had more than $250,000 in their accounts. The Federal Deposit Insurance Corporation insures deposits only up to $250,000, so anything more than that would not have the same government protection. Close to nine-tenths of Signature Bank’s roughly $88 billion in deposits were uninsured at the end of last year, according to regulatory filings. As Silicon Valley Bank’s troubles began to spread last week, many of Signature’s customers panicked and began calling the bank, worried that their own deposits could be at risk.

Signature saw a torrent of deposits leaving its coffers on Friday, according to a person with knowledge of the matter, and the bank’s stock, along with the stocks of some of its peers, also continued to tank.

What have regulators done so far?

Regulators have been rushing to contain the fallout , and the collapse of two banks in three days is prompting a swift re-evaluation of the Fed’s interest rate increases. Before the fallout from the banks’ collapse this weekend, the Fed had been expected to make a half-point increase at its next meeting, March 21-22.

In announcing the closing of Signature, regulators said on Sunday that depositors of the bank and Silicon Valley Bank would be made whole regardless of how much they held in their accounts and would have full access to their money by Monday.

On Monday morning, President Biden reassured Americans that the financial system was stable and that customers’ deposits would “be there when you need them.”

Treasury Secretary Janet L. Yellen said on Sunday that regulators had been working over the weekend to stabilize Silicon Valley Bank — and she tried to assure the public that the broader American banking system was “safe and well capitalized.”

At the same time, she acknowledged that many small businesses were counting on funds tied up at the bank.

Ms. Yellen suggested that a possible solution could be an acquisition of Silicon Valley Bank, emphasizing that regulators were trying to address the situation “in a timely way.” According to a person familiar with the matter, the F.D.I.C. on Saturday started an auction for Silicon Valley Bank that was set to wrap up Sunday afternoon.

On Sunday, the F.D.I.C. invoked a “systemic risk exception,” which allows the government to pay back uninsured depositors to prevent dire consequences for the economy or financial instability. Also on Sunday, the Fed announced that it would set up an emergency lending program, with approval from the Treasury, to provide additional funding to eligible banks and help ensure that they are able to “meet the needs of all their depositors.”

Are other banks at risk?

The demise of both Silicon Valley Bank and Signature Bank put a spotlight on the challenges surrounding small and midsize banks , which tend to focus on niche businesses and can be more vulnerable to bank runs than larger peers. The most immediate concern is that the failure of one would scare off customers of other banks. Both Silicon Valley Bank and Signature are small compared with the nation’s largest banks — Silicon Valley Bank’s $209 billion and Signature’s $110 billion in assets pale next to the more than $3 trillion at JPMorgan Chase. But bank runs can happen when customers or investors panic and start pulling their deposits.

On Monday, smaller banks rushed to reassure customers that they were on firmer financial footing.

Shares of U.S. regional banks plummeted on Monday, as investors tried to get a handle on the sudden collapse of Signature Bank and Silicon Valley Bank. First Republic Bank took the worst beating on the day, down 60 percent. Western Alliance in Arizona tumbled 45 percent, KeyCorp and Comerica both tumbled nearly 30 percent, and Zions Bancorp in Utah fell about 25 percent.

Shares of bigger banks were not affected as much: Citigroup and Wells Fargo each fell more than 7 percent, Bank of America fell more than 3 percent, and JPMorgan dipped around 1 percent. The KBW bank index, which tracks the performance of 24 major banks, fell 10 percent, adding to sharp losses last week that erased nearly $200 billion from the aggregate value of the banks in the index.

How is this different from the 2008 bailouts?

Over the past few days, as regulators took control of two banks and guaranteed deposit protections at the institutions, some compared the moves to the 2008 bank bailouts.

On Monday, President Biden tried to distinguish these moves to prevent more bank runs and those taken during the 2008 financial crisis, when hundreds of billions of dollars were provided to rescue the bank industry. Taxpayers shouldered much of that rescue, while the costs to make depositors of Silicon Valley Bank and Signature Bank whole will be financed by fees paid by banks into the F.D.I.C.

“This is an important point: No losses will be borne by the taxpayers,” Mr. Biden said in his statement on Monday morning. “Let me repeat that: No losses will be borne by the taxpayers.”

But he said that “investors in the banks will not be protected.”

“They knowingly took a risk, and when the risk didn’t pay off, investors lose their money,” the president said. “That’s how capitalism works.”

Jessica Silver-Greenberg contributed reporting.

Vivian Giang joined The Times as a senior staff editor in 2019. Prior to The Times, she was a freelance writer and editor covering the workplace. More about Vivian Giang

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The swift collapse of Silicon Valley Bank, explained

What we know about the bank failure and fallout.

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Silicon Valley Bank , one of tech’s favorite lenders, collapsed on Friday after 48 hours of chaos, becoming the second-largest bank failure in US history.

The bank’s blowup has sent shockwaves across the tech sector, Wall Street, and Washington, DC , amid concerns that other banks could be in trouble or that contagion could set in. In the days after Silicon Valley Bank’s collapse, the panic appeared to spread, leading to the failure of additional banks, including Signature Bank of New York , which had bet on crypto. But it’s not clear how serious the fallout would be.

(Disclosure: Vox Media, which owns Vox, banked with SVB before its closure.)

The federal government has said it will step in to make sure all of Silicon Valley Bank depositors would have access to their funds. To some, this looks like a bailout , but President Joe Biden has said that those funds would not come from taxpayer dollars, but via loans from a newly created Bank Term Funding Program. It’s also important to note for consumers that the money you have in the bank right now is almost definitely fine.

Follow here for all of Vox’s coverage of this developing story.

9 questions about Silicon Valley Bank’s collapse, answered

Tech’s favorite bank just failed. What does that mean for you?

The Fed prioritizes inflation over bank turmoil with its latest rate hike

It announced a quarter-point increase to the interest rate this week, despite recent banking woes.

Should you be worried about your small bank?

Turns out you don’t have to be that big to be too big to fail.

What happens to Silicon Valley without Silicon Valley Bank?

A regional bank helped the tech industry grow. Now it might need to shrink.

Why the Silicon Valley Bank collapse couldn’t have happened in this one state

Don’t want to lose your bank deposits? Simple: Bank in Massachusetts.

Did the Fed break Silicon Valley Bank?

SVB’s collapse is the price of the Fed’s interest rate gambit.

Why bailouts keep happening even though everyone hates them

A bailout is the worst option, except for all the others.

What the hell is a “woke bank”?

As Silicon Valley Bank collapses, the right returns to its favorite boogeyman.

Trump-era banking law paved way for Silicon Valley Bank’s collapse

Silicon Valley Bank was a test case for Congress’s 2018 bipartisan banking deregulation law. It failed.

Is this a bailout?

After SVB, is the government bailing out the banks again? Yes-ish. But this isn’t 2008.

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• Copy URL https://www.pbs.org/newshour/economy/what-to-know-about-the-silicon-valley-bank-collapse

What to know about the Silicon Valley Bank collapse

WASHINGTON (AP) — Two large banks that cater to the tech industry have collapsed after a bank run, government agencies are taking emergency measures to backstop the financial system, and President Joe Biden is reassuring Americans that the money they have in banks is safe.

It’s all eerily reminiscent of the financial meltdown that began with the bursting of the housing bubble 15 years ago. Yet the initial pace this time around seems even faster.

Over the last three days, the U.S. seized the two financial institutions after a bank run on Silicon Valley Bank, based in Santa Clara, California. It was the largest bank failure since Washington Mutual went under in 2008.

How did we get here? And will the steps the government unveiled over the weekend be enough?

Here are some questions and answers about what has happened and why it matters:

Why did Silicon Valley Bank fail?

Silicon Valley Bank had already been hit hard by a rough patch for technology companies in recent months and the Federal Reserve’s aggressive plan to increase interest rates to combat inflation compounded its problems.

The bank held billions of dollars worth of Treasuries and other bonds, which is typical for most banks as they are considered safe investments. However, the value of previously issued bonds has begun to fall because they pay lower interest rates than comparable bonds issued in today’s higher interest rate environment.

That’s usually not an issue either because bonds are considered long term investments and banks are not required to book declining values until they are sold. Such bonds are not sold for a loss unless there is an emergency and the bank needs cash.

Silicon Valley, the bank that collapsed Friday, had an emergency. Its customers were largely startups and other tech-centric companies that needed more cash over the past year, so they began withdrawing their deposits. That forced the bank to sell a chunk of its bonds at a steep loss, and the pace of those withdrawals accelerated as word spread, effectively rendering Silicon Valley Bank insolvent.

What did the government do on Sunday?

The Federal Reserve, the U.S. Treasury Department, and Federal Deposit Insurance Corporation decided to guarantee all deposits at Silicon Valley Bank, as well as at New York’s Signature Bank, which was seized on Sunday. Critically, they agreed to guarantee all deposits, above and beyond the limit on insured deposits of $250,000.

Many of Silicon Valley’s startup tech customers and venture capitalists had far more than $250,000 at the bank. As a result, as much as 90 percent of Silicon Valley’s deposits were uninsured. Without the government’s decision to backstop them all, many companies would have lost funds needed to meet payroll, pay bills, and keep the lights on.

The goal of the expanded guarantees is to avert bank runs — where customers rush to remove their money — by establishing the Fed’s commitment to protecting the deposits of businesses and individuals and calming nerves after a harrowing few days.

ANALYSIS: What Silicon Valley Bank collapse means for the U.S. financial system

Also late Sunday, the Federal Reserve initiated a broad emergency lending program intended to shore up confidence in the nation’s financial system.

Banks will be allowed to borrow money straight from the Fed in order to cover any potential rush of customer withdrawals without being forced into the type of money-losing bond sales that would threaten their financial stability. Such fire sales are what caused Silicon Valley Bank’s collapse.

If all works as planned, the emergency lending program may not actually have to lend much money. Rather, it will reassure the public that the Fed will cover their deposits and that it is willing to lend big to do so. There is no cap on the amount that banks can borrow, other than their ability to provide collateral.

How is the program intended to work?

Unlike its more byzantine efforts to rescue the banking system during the financial crisis of 2007-08, the Fed’s approach this time is relatively straightforward. It has set up a new lending facility with the bureaucratic moniker, “Bank Term Funding Program.”

The program will provide loans to banks, credit unions, and other financial institutions for up to a year. The banks are being asked to post Treasuries and other government-backed bonds as collateral.

The Fed is being generous in its terms: It will charge a relatively low interest rate — just 0.1 percentage points higher than market rates — and it will lend against the face value of the bonds, rather than the market value. Lending against the face value of bonds is a key provision that will allow banks to borrow more money because the value of those bonds, at least on paper, has fallen as interest rates have moved higher.

As of the end of last year U.S. banks held Treasuries and other securities with about $620 billion of unrealized losses, according to the FDIC . That means they would take huge losses if forced to sell those securities to cover a rush of withdrawals.

How did the banks end up with such big losses?

Ironically, a big chunk of that $620 billion in unrealized losses can be tied to the Federal Reserve’s own interest-rate policies over the past year.

READ MORE: Yellen says there will be no bailout for collapsed Silicon Valley Bank

In its fight to cool the economy and bring down inflation, the Fed has rapidly pushed up its benchmark interest rate from nearly zero to about 4.6 percent. That has indirectly lifted the yield, or interest paid, on a range of government bonds, particularly two-year Treasuries, which topped 5 percent until the end of last week.

When new bonds arrive with higher interest rates, it makes existing bonds with lower yields much less valuable if they must be sold. Banks are not forced to recognize such losses on their books until they sell those assets, which Silicon Valley was forced to do.

How important are the government guarantees?

They’re very important. Legally, the FDIC is required to pursue the cheapest route when winding down a bank. In the case of Silicon Valley or Signature, that would have meant sticking to rules on the books, meaning that only the first $250,000 in depositors’ accounts would be covered.

Going beyond the $250,000 cap required a decision that the failure of the two banks posed a “systemic risk.” The Fed’s six-member board unanimously reached that conclusion. The FDIC and the Treasury Secretary went along with the decision as well.

Will these programs spend taxpayer dollars?

The U.S. says that guaranteeing the deposits won’t require any taxpayer funds. Instead, any losses from the FDIC’s insurance fund would be replenished by a levying an additional fee on banks.

READ MORE: Silicon Valley Bank’s failure shakes companies worldwide, from wine country to London

Yet Krishna Guha, an analyst with the investment bank Evercore ISI, said that political opponents will argue that the higher FDIC fees will “ultimately fall on small banks and Main Street business.” That, in theory, could cost consumers and businesses in the long run.

Will it all work?

Guha and other analysts say that the government’s response is expansive and should stabilize the banking system, though share prices for medium-sized banks, similar to Silicon Valley and Signature, plunged Monday.

“We think the double-barreled bazooka should be enough to quell potential runs at other regional banks and restore relative stability in the days ahead,” Guha wrote in a note to clients.

Paul Ashworth, an economist at Capital Economics, said the Fed’s lending program means banks should be able to “ride out the storm.”

“These are strong moves,” he said.

Yet Ashworth also added a note of caution: “Rationally, this should be enough to stop any contagion from spreading and taking down more banks … but contagion has always been more about irrational fear, so we would stress that there is no guarantee this will work.”

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What Does the Failure of Silicon Valley Bank Say About the State of Finance?

The bank run that led to the stunning collapse of Silicon Valley Bank late last week continues to send shivers through the American financial system. SVB, the Santa Clara, California-based bank that catered to the tech industry, was the biggest US lender to fail since the 2008 global financial crisis—and was the second-biggest to fail ever.

Analysts say SVB was largely unprepared for the Federal Reserve’s aggressive interest rate increases, which shrank the value of its investments. As word spread quickly online that the bank could be in trouble last week, customers withdrew $42 billion in a single day, leaving the bank with a $1 billion negative balance, according to a regulatory filing by the company.

While financial regulators have announced that the US will guarantee all deposits at SVB, its collapse has spooked customers at other banks and raised concerns about other financial institutions. We asked Harvard Business School faculty who study banks: What does the failure of SVB say about the current state of the banking industry? Here’s what they said.

Victoria Ivashina: Banks are ‘fundamentally fragile.’

Much has been said already about the textbook nature of the deposits run on SVB, and the subsequent run on other regional banks. Many observers postulate that the vulnerability was hiding in plain sight (an unsettling thought), a result of a combination of COVID government stimulus followed by a series of rates hikes. I would add other contributors: general uncertainty exhaustion after several years of dealing with surprises ranging from shortages and runs on basic goods to the Fed’s limited ability to control or even forecast inflation. Something will also have to be said eventually about the profitable business of inciting runs that some hedge funds have been up to. While all of these factors likely played a role, this narrative oversimplifies a few points and plays into the panic.

Banks are fundamentally fragile, and as such, are prone to self-fulfilling prophesies. Deposit insurance has been effective in reducing deposits runs, but the truth is that—once the confidence is eroded—banks tend to face revolving credit runs and market funding runs. The deposits run in the US might feel like a thing of the past, but the history of the 2008 crisis saw many such examples. Regulation and supervision help moderate the depth of the shock that banks can withstand before a run could be unleashed, but they cannot eliminate the possibility of such a run. The relevant question is then: What has triggered the SVB run? This is where things get more complicated, and—the good news—they also get more idiosyncratic.

We actually do not know much about SVB’s exposures, since they fell below the Fed’s threshold for annual collection of Form FR Y-14A Capital Assessments and Stress Testing. At the moment, we also cannot track what fraction of SVB’s deposits was connected to the local venture capital (VC) ecosystem that it was serving. But we do know that that this bank was different, and it is highlighted in its name and in the history of its public statement.

"The bottom line: The art is not to predict whether a run might take place, but when."

For example, it is very clear that there is no other bank with over half of its loan portfolio dedicated to private equity subscription lines—that is, lines secured by VC and private equity fund commitments but ones used to fund investments in the short- to mid-term in lieu of capital call. It appears that this unusual specialized business model might have introduced significant correlation between large deposits and its business of revolving credit, on which it had substantial exposure. To add to that, the SVB leadership’s unorthodox approach to management of liquidity pressures clearly backfired.

The bottom line: The art is not to predict whether a run might take place, but when. The triggers of the run on SVB were no more apparent than the runs we have seen in the crypto space. The swift government actions to back regional banks, in my view, are commendable, although more targeted to managing general confidence than reflecting the isolated nature of the SVB troubles. They should be effective in reestablishing confidence in the broader financial system.

As to SVB, its credit specialization in the VC space is leaving an important void. I am less concerned about subscription lines, although this might temporarily bounce into pension liquidity. These events, however, are likely to have other lasting effects on the VC industry side, a subject for another day.

Victoria Ivashina is the Lovett-Learned Professor of Finance and head of the Finance Unit.

Erik Stafford: Interest rate exposure and customer withdrawals were devastating

SVB was unique in some ways, but also did some pretty normal bank activities. The business of banking involves investing in assets that are a little bit longer-term and a little bit riskier than the liabilities used to fund these investments. Banks invest in assets like US Treasury bonds, mortgages, and corporate loans. The liability side of their portfolio is a combination of checking and savings deposits, CDs, and debt.

Most deposit rates reset fairly often, so they represent relatively short-term borrowing for the bank. The equity receives the net cash flows and realizes the net gains and losses from value changes. Bank annual reports emphasize that bank earnings or cash flows are relatively insensitive to changes in interest rates.

Additionally, the stability of net interest margin (interest received minus interest paid) is pointed to as evidence that banks have little interest rate exposure. Many bank loans to businesses have floating interest rates, but most bank loans are mortgages, which tend to have fixed interest rates, and US Treasury bonds have fixed interest rates, too. Of course, because the interest payments are fixed, the value of these assets is sensitive to changes in market interest rates.

From an investment perspective, the value sensitivity to changes in interest rates is the most relevant. Note that it is typically difficult to hedge both the value and cash flow interest rate exposure, so the fact that the cash flows appear insensitive to interest rate changes suggests that the value-based interest rate exposure has not been hedged.

"SVB was forced to issue a large amount of equity, which brought a lot of attention to their situation."

Banks are highly levered, which magnifies the asset risk exposures for the equity. Suppose that bank assets resemble two-year bonds, interest rates increase quickly from 1 percent to 5 percent, and banks have equity of $20 for every $100 of assets. In order for the two-year bonds to earn the new market rate of 5 percent, their value will need to fall by about 7.5 percent, so assets of $100 now have a market value of $92.50. Because of the leverage, this $7.50 loss per $100 of assets represents a loss of $7.50 per $20 of equity, or around -38 percent.

One unique feature of SVB was their large uninsured deposit base. It is often argued that the present value of the ongoing profits that will be generated from deposit accounts effectively hedge the value-based interest rate exposure of the bank assets. In other words, the value of these accounts to the bank increase when interest rates increase, which offsets, at least partially, the interest rate exposure of the assets described above. One interesting feature of the SVB situation is that the value of their deposits fell as interest rates increased in a somewhat unexpected way. Well before the bank run last week, their deposit customers had been withdrawing money to pay their operating expenses, while their deposit inflows from new VC funding slowed, which produced large net withdrawals of deposits.

In this case, deposits appear to have added, rather than hedged, value-based interest rate exposure. The bank run was devastating for SVB, but the real problems that triggered this event were the underlying interest rate exposure and the slow withdrawal of deposits. SVB was forced to issue a large amount of equity, which brought a lot of attention to their situation. There is now a lot of attention on the situation at all banks. The underlying interest rate exposure is common across banks, so some drop in bank equity values is appropriate. An important question to be determined is whether there are other banks who have been experiencing a slow withdrawal of customer deposit balances. This is quickly being investigated by investors and regulators.

Erik Stafford is the John A. Paulson Professor of Business Administration.

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Could Silicon Valley Bank happen again? ‘The short answer is, yes,’ says professor who sees $2 trillion of losses on the books

At the Fortune Future of Finance conference, Tomasz Piskorski, Edward S. Gordon Professor of Real Estate, Finance Division, Columbia Business School, tackled the subject of much of his recent research: the collapse of Silicon Valley Bank and its after-effects on the banking industry. Last year, Piskorski was one of several academics to look at the sector . Their paper found a “more than $2 trillion decline in banks’ asset values following the monetary tightening of 2022.” Below is a transcript of Piskorski’s presentation to the conference on his research.

Tomasz Piskorski: Welcome everybody. Glad to be here. I’m a professor at Columbia Business School. I do a lot of work on financial intermediation, banking, fintech, and real estate. And recently, along with my colleagues, I have done quite a lot of work on financial stability. 

And drawing lessons from the recent bank failures such as the Silicon Valley Bank, I would like to tell you a little bit about it. So, let me tell you our view—what we think is one of the main sources of risk currently in the U.S. financial system. 

From our perspective, it’s really the fact that banks have very high leverage. If you look at a typical bank in the United States, there is really very little variation, whether you’re a small bank, whether you’re a large bank. Banks are essentially about 90% debt-funded, and only 10% of equity. So think about what it means: Consider, for example, a situation when there is a modest decline in the value of bank assets, let’s say 10%. That already potentially puts this institution at the brink of insolvency, because the value of the assets will be less than the face value of the liabilities. And if you look at the banking sector as a whole, this is $24 trillion worth of assets. 

On the asset side, banks take a lot of duration risk and credit risk. They give a lot of assets like securities, long-term treasuries, long-term mortgage-backed securities. In addition, they have real estate loans, including commercial real estate loans, and other loans like corporate loans with a credit risk. And the way they finance it is essentially with short-term debt. Most of these debts are deposits. About 18 trillion of them and about half are insured by FDIC and half are uninsured. These deposits are both $250,000. And in addition to that, the banks have firmly seen equity caution. So, you can see this is a pretty fragile system with very little equity financing and a lot of debt financing. 

And in that sense, the recent monetary tightening illustrates this point: the Fed raised interest rates very aggressively, essentially, in a matter of a year, they went from zero to 5%. What that means to the value of long duration assets: There has been a very big decline in value, including U.S. Treasuries and so on. If you look at long duration assets, long-term bonds, they declined by, in the order of 30%. So, when you take this decline, the market-implied decline in the value of assets and apply it to bank balance sheets, what you will find is that, in the aggregate, the value of the bank assets right now is about $2 trillion less relative to where it was at the beginning of the Fed tightening cycle. 

And in fact, there’s quite a few banks in the U.S. right now–and Silicon Valley Bank was one of them–that currently have the value of the assets, the market value, of being less than the face value of the debt. So, in principle, if the depositors would show up, this bank would fail, unless of course regulators step in. 

Now, I’m not trying to say that all these banks will fail—it depends on your funding. And in particular, it depends what portion of your funding is unstable, especially uninsured deposits. Because uninsured depositors can lose money if the bank fails. And, you know, in that sense, Silicon Valley Bank was an outlier in that 80% of its assets were financed with uninsured deposits. Essentially, Silicon Valley Bank had just uninsured deposit funding. So, it was very fragile in that sense. 

The mechanism is as follows: The interest rates go up, you can add to this credit risk, bank asset values decline like they did, and insured depositors get spooked, they see this big declines in asset values, they worry about solvency of the bank, they start withdrawing money, and then you can end up with a run equilibrium. 

The key question that I was talking a lot with regulators about that is, how special is a Silicon Valley Bank? Are there other banks like that? And the short answer is, yes, there are quite a few banks in the United States right now that have very similar risk characteristics, not as extreme as Silicon Valley Bank, but they are actually at the risk of a run. 

And this is just the duration effect. If you add to this credit risk, remember that for midsize banks, about 25 to 30% of the assets are commercial real estate loans. We did an analysis loan by loan 14% of these loans are underwater, meaning the property value is less worth less currently than the face value of debt. If you look at office loans, it’s 44%. So, in addition to this duration risk, there is also a credit risk that will enlarge the set of banks that could potentially fail. 

So, the obvious question is—talking all the time with regulators—what to do about it? And one natural answer is, well, let’s raise the bank capital requirements. Maybe not right now. Once things come down a bit. That would make the system more safe, but the obvious question is how much leverage financial institutions really need to provide efficient functions like originating loans, and doing other things. And in fact, we have a window in it: We compare the leverage of banks, to non-bank lenders. The dark black curve shows you the non-bank lenders. These are the institutions that make loans like banks, this is in the mortgage market, but don’t have access to insure deposit funding, and are lightly regulated. And guess what? In this private market benchmark, without access to insure deposit funding, these institutions have much less leverage and much more equity funding. And the lesson we draw from this is you can be a pretty good lender with much lower leverage. 

And what’s interesting is the biggest discrepancy is actually for smaller and midsize banks. What it means is that, let’s say JPMorgan, their leverage is pretty close to what they would have been levered, even if they didn’t have access to ensure deposit funding. It’s precisely the smaller and midsize banks, including banks like Silicon Valley Bank, that will deliver much more. And because of these implicit and explicit guarantees, Silicon Valley Bank did not have much insured deposits funding, but there’s a lot of other banks that do and take advantage of that. 

One thing is that if you talk to bank CEOs, they will tell you, “Hey, if you raise bank capital requirements, the lending will collapse, and we’re gonna have a contraction of economic activity, we just really cannot do it.” Of course, the answer to this question depends on how important are banks in financing credit to households and firms. And let me just tell you, they’re not as important as commonly thought. In the 1970s, a bank balance sheet financed 60% of lending to households. So in other words, in the 1970s, banks were very important. Nowadays, banks finance only about a third of credit to house concerns. The rest is financed with debt securities, private credit, and so on, and so forth. So in the aggregate, the banks are much less important than they were a few decades ago. And what it means it has interesting implications for capital regulation. 

We actually did a simulation: if you would raise capital requirements on U.S. banks, while the amount of bank balance sheet lending will drop substantially, and so will the bank profits. So, it’s kind of understandable why some bank CEOs might not like it. But the aggregate decline in lending would actually be quite modest. What would simply happen is that the bank would still make loans, but instead of keeping them on the balance sheet, they would sell them, and there would be expansion of non-bank and private credit. 

So, let me just conclude with some thoughts on where I’m thinking it will go going forward.

First, I think the banks are continuing to become increasingly less relevant, and especially smaller and midsize banks will have ongoing consolidation in the banking industry. I predict in a few years, we’ll have much fewer smaller and midsize banks. I also think that we’ll see a growing rise of debt securities and private credit. Private credit is rapidly increasing right now. And of course, who’s going to finance a lot of that, you know, vehicles like money market funds, exchange, traded funds, and so on. 

On the asset side, the traditional banks already lost a lot of edge. Think about mortgage finance, which is a very important debt market. Now, banks account for less than half of the lending there. And the biggest lender is Quicken Loan, currently called Rocket Mortgage, and they just have the platform, they don’t have deposits, it’s a non-bank. 

And the impact of AI is likely to make things potentially worse for banks. As we just heard a little bit in an earlier session, I expect these non-bank financial institutions to possibly be more able to innovate in this space, especially because they are like more lightly regulated. And so essentially, the main value that banks currently derive is on the liabilities side: It’s this access to ensure deposit funding allows them this cheap debt which they can recycle into loans, but also into securities and other vehicles. So in some ways, survival of especially midsize and smaller banks critically depends on continued access to these implicit and explicit subsidies. And if the regulators decide to crack it down, we will see further contraction of smaller and midsize banks. Bigger banks, of course, will have to innovate harder and harder to stay relevant, but they have a scale, so they probably will be able to continue operating. And the last thing even on the liabilities side, there are many innovations that threaten banks. Think about Central Bank digital currency or alternative payment systems. If this takes the deposit role from the banks, they will be really in a precarious state because, you know, on the assets side it is already very difficult for them to make money. Once they lose these deposit advantages, it will be a difficult position for them. So, thank you very much and thanks for your attention.

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• Program on Financial Stability

Lessons from Applying the Liquidity Coverage Ratio to Silicon Valley Bank

The failure of Silicon Valley Bank (SVB) after a run by uninsured depositors has focused attention on bank liquidity regulation in dramatic fashion.

Less than four years ago, the US bank regulators, following an Act of Congress, ruled that most banks with between $50 billion and $250 billion in assets would no longer be subject to the liquidity coverage ratio, or LCR, or other enhanced prudential standards that they apply to the most systemically important banks. Their 2019 “tailoring” rule is here , a simple chart is here .

The LCR rule requires banks to hold sufficient high-quality liquid assets (HQLA) to manage expected net cash outflows in a 30-day stress scenario. Under the original 2014 version of the rule, banks with $250 billion in assets or $10 billion in foreign exposures had to maintain their LCR ratios above 100%. SVB would have been subject to that ratio because its foreign exposures met the threshold.

We reviewed SVB’s public financials and concluded that its LCR would have been 75% at the end of 2022, substantially below the threshold. This result suggests that the 2019 tailoring rule was complicit in the run and failure at SVB.

Of course, if the bank were subject to the rule, its supervisors would not have allowed its LCR to fall so far. Supervisors shouldn’t just react when a bank breaches a limit—they should act when limit breaches become foreseeable. Even under its existing regulatory framework, SVB’s supervisors should have identified the liquidity risks the company faced due to its high concentration to, and run-inducing dependence on, a specific type of corporate depositor.

Moreover, if the bank had been subject to the rule, it would have been required to publicize more data about its liquidity risks. The market, not just bank supervisors, may have been more focused on the risks it faced. The bank’s managers would have had to manage liquidity risk very differently. To get to compliance, the bank would have needed far more high-quality liquid assets—$18 billion more to get to a 100% LCR, and $36 billion more to get to the 125% LCR that US global systemically important banks maintain on average.

To be sure, compliance with the LCR alone would not have saved SVB’s management from its mistakes managing interest-rate risk in the bank’s massive, long-dated portfolio of agency mortgage-backed securities (MBS). If faced with the LCR rule two or three years ago, they could have simply shifted from long-dated MBS to long-dated Treasuries—bringing their LCR in compliance while staying extraordinarily exposed to rising rates. The bank might have faced the same run after depositors became concerned about the realized losses on Treasuries and unrealized losses on MBS.

To manage the run, the bank would have needed more of the most liquid HQLAs—reserve balances or short-term Treasuries—not more of the long-dated stuff. The LCR as currently written does not distinguish securities by their maturity or recognize that a bank may be reluctant to take losses by selling them.

This brief note describes our calculations (Figure 2) and provides initial conclusions. The caveat is that we were limited to public reports—the company’s 10-K; Y-15 Systemic Risk Report; call reports; and investor presentations. The Fed did require the company to submit the FR-2052A liquidity monitoring report, but that is not publicly available. We believe we have made the most of the information that is publicly available. [1]

Numerator: High-Quality Liquid Assets

HQLAs are relatively easy to calculate. Level 1 assets are considered the most liquid assets and enter the numerator with no haircut. They include reserve balances with the central bank, government debt, and government-guaranteed securities. At the end of 2022, SVB had $31.7 billion in Level 1 assets: $7.8 billion in reserve balances, $16.2 billion in U.S. Treasuries, and $7.7 billion in mortgage securities issued by Ginnie Mae, which the government fully guarantees. Level 2a assets are considered somewhat more risky and receive a 15% haircut. They include government agency debt and agency mortgage-backed securities. SVB had more than $60 billion in agency mortgage-backed securities. However, under the LCR rules, Level 2a assets can’t be more than 40% of total HQLA, so SVB’s Level 2a assets would have been capped at $21.2 billion.

Total HQLA: $52.9 billion.

Denominator: Cash Outflows

The denominator is harder to calculate and open to some interpretation. If SVB had been subject to the rule, its management would have had to hammer out all of the issues in the following paragraphs with its Fed supervisors, using far more detailed data disclosures than the company was actually required to make to the public.

To compute outflows, the LCR rules assume stressed runoff rates for each type of bank liability based on experience in past crises and on management and supervisory judgment. SVB had $173.1 billion in deposits at the end of 2022. Of those, $165.4 billion were uninsured: $151.5 billion were uninsured deposits in U.S. offices that exceeded the FDIC insurance limit; another $13.9 billion were foreign deposits, which the FDIC doesn’t insure (see the company’s last 10-K , page 80). We assume the remaining $7.7 billion was insured. Under the US rules, stressed outflows for insured deposits range from 3% to 40%: 3% for retail and small business customers, and 5% to 40% for wholesale customers that are not financial companies. We’ll assume an average 5% runoff of insured deposits. That yields a small outflow of $0.4 billion.

Calculating outflows on the $165.4 billion in uninsured deposits is the largest part of SVB’s LCR and requires the most judgment. These were also the depositors who ran the bank this month, so it is important to understand how the rule would have treated them ex ante.

Within the uninsured deposit category, the LCR rules makes key distinctions:

• Retail clients are considered more loyal (sticky) and less likely to run than wholesale clients.
• Among wholesale accounts, operational deposits—deposits that customers need to place with a bank in order to use services such as payment settlement systems, and don’t bear interest—are considered stickier than non-operational deposits—which are interest-bearing; the rules assume these depositors are more likely to switch to other banks to get better rates.
• Also among wholesale accounts, nonfinancial company deposits are considered stickier than financial company deposits.

SVB reported its end-2022 short-term wholesale funding in its Y-15 Systemic Risk Report , as the Fed requires. Uninsured, nonfinancial wholesale deposits were $109.6 billion; uninsured, financial wholesale deposits were $28.8 billion. It is typically difficult to estimate from public filings how much of a bank’s deposits are operational, but the company in a January 2023 investor presentation said that 47% of clients’ funds were in “operating cash typically held in on-balance sheet, noninterest-bearing deposits” (see the same investor presentation , p. 11). Accepting the company’s definition of “operating” and applying that proportion yields $65.0 billion in operational uninsured deposits from both financial and nonfinancial customers, which have a 25% run-off factor under the rule; $58.1 billion in non-operational uninsured deposits from nonfinancial customers (40%); and $15.3 billion in non-operational uninsured deposits from financial customers (100%). The combined outflow from uninsured wholesale clients comes to $54.7 billion.

We assume the remaining $27.1 billion of uninsured deposits are retail or small business. Applying the 10% runoff factor under the rule yields an outflow of $2.7 billion.

The LCR rules also require banks to assume that its customers draw down on a portion of their outstanding lines of credit and other commitments. The drawdown rates are 5% for commitments to retail customers, 10% or 30% for nonfinancial wholesale customers, and 40% for financial entities other than banks ( 12 CFR 249.32 (e)(1) ). SVB had $62.2 billion in such commitments at the end of 2022; assuming a 20% average drawdown rate, the outflow would be $12.5 billion.

Finally, SVB had $13.6 billion in short-term borrowings, of which $13.0 billion were advances from the Federal Home Loan Bank (FHLB) of San Francisco. The outflow for such borrowings is 25%, or $3.4 billion.

The total cash outflow comes to $73.7 billion.

Denominator: Cash Inflows

Next, inflows. The LCR allows banks to subtract contractual inflows from their estimate of 30-day outflows, according to the LCR guidelines (para. 142).

Contractual inflows may include loans that are scheduled to mature during the 30-day period. The rules then allow banks to treat half of such repayments as inflows. However, a close look at SVB’s $73.6 billion portfolio of performing loans suggests that it should have counted on very little of those loans to be repaid over 30 days.

First, of that total, $46.0 billion were revolving loans ( SVB 10-K , p. 132-33). Borrowers are expected to roll over such loans and they are not included in inflows, per the US final rule : “With respect to revolving credit facilities, already drawn amounts would not have been included in a covered company's inflow amount.” To make clear why such loans should not be considered inflows in SVB’s case, note that about $40 billion of the total represents loans to private equity or venture capital funds. According to the company: “The vast majority of this portfolio consists of capital call lines of credit, the repayment of which is dependent on the payment of capital calls by the underlying limited partner investors in the funds managed by these firms” ( SVB 10-K , p.70). Surely, it makes sense that the rules would not expect SVB to be able to demand that venture capital investors repay their revolving loans in stressed market conditions.

Eliminating the revolving loans leaves $27.6 billion in term loans. These included $6.1 billion in “investor-dependent” loans. Borrowers of these loans may require additional equity financing from venture capital firms or other investors, or in some cases a successful sale to a third party or an IPO, according to the company’s 10-K (p. 70). Further, the risk of “prolonged market volatility… particularly applies to Investor Dependent loans, where repayment is dependent on the borrower’s ability to fundraise or exit” (p. 74). Without specific backing from the Basel guidelines or the agencies’ final rule, let’s agree for the purpose of today’s exercise that it wouldn’t be prudent to assume repayment of investor-dependent loans in stressed market conditions. Of the remaining $21.5 billion in term loans, less than $3 billion mature in under one year (p.73). Assuming one-twelfth of those loans pay back at maturity within 30 days and applying the 50% haircut in the rule gives a cash inflow of $0.1 billion.

SVB reported $5.3 billion in deposits at other financial institutions. Under the rules, banks can’t include operational deposits in their inflow estimates, since “these deposits are required for operational reasons, and are therefore not available to the depositing bank to repay other outflows” ( LCR guidelines , January 2013, para. 98). The US regulators’ final rule in 2014 similarly excluded “any inflows derived from amounts that a covered company holds in operational deposits at other regulated financial companies… [T]he agencies reasoned that it would be unlikely that a covered company would be able to withdraw these funds in a crisis to meet other liquidity needs, and therefore excluded them.” However, it’s impossible to tell from the public filings how much of SVB’s bank deposits are operational. We assume 50% are operational. That yields an inflow of $2.6 billion, using the 100% factor in the rule.

Cash inflows: $2.8 billion. Net outflows: $71.0 billion.

The resulting LCR is 75%: 52.9/71.0.

Conclusions

It is a myth that the LCR is a complex rule. It is relatively simple to compute for a relatively simple company. The calculations in this brief were not complicated. The challenge lies in working with the available public data for a company that is not required to disclose such data. The exercise also revealed some lack of clarity around definitions, which a bank would have to work out with its supervisors. For those reasons, there was much guesswork involved in our calculations, and the results may be debated.

Still, this exercise should make it clear that SVB would have managed its liquidity risks much differently if it had been subject to the LCR. It would have disclosed more information to supervisors and market participants. Supervisors and market participants would have demanded it hold more HQLAs, probably at a level of 125% or more, where other US companies sit, and potentially higher, given the bank’s high concentration in a risky industry. To get to 100%, SVB would have needed $18 billion more HQLA. Assuming the average actual LCR for US global systemically important banks of 125%, SVB would have needed $36 billion more.

This result is notably different from an analysis published by the Bank Policy Institute , an industry think-tank. We made the following different assumptions: assuming the company would be subject to the full 100% LCR; defining the bulk of SVB’s nonfinancial business customers as wholesale, rather than small business-cum-retail, per the Y-15; finding that the bulk of SVB’s loans would not provide much cash inflows over a 30-day period; and excluding half of inflows from deposits held at other banks, since it’s reasonable to assume much of those would be needed for operational purposes.

The policy community is already rethinking the regulatory tailoring that the banking agencies undertook in 2019. Most jurisdictions—the UK, Europe, most of Asia—have gone in the other direction. They have maintained full LCR disclosure and threshold requirements for all banks, not just the largest ones. At the same time, they have strengthened requirements for larger institutions. Outside the US, the global average is about 140%, according to the Basel committee’s dashboards (see Figure 1). That would have required nearly $50 billion more HQLA for SVB.

While there is broad agreement in the US that most banks are small and should not need to follow enhanced prudential standards designed for large, complex, and internationally active banks, the definition of “small” has crept up beyond any sense or reason. SVB was not small.

The ex-post policy review should also reconsider the “modified” LCR that the bank regulators implemented in 2014. Under the original 2014 rule, the full 100% LCR only applied to banks with more than $250 billion in assets or more than $10 billion in foreign exposures. Other large banks were subject to a modified version that allowed them to hold 30% less HQLAs. Banks with less than $50 billion in assets were fully exempt from the LCR. If US regulators had not changed the rule in 2019, it would have required SVB to hold the full 100% of estimated net cash flows in HQLA because its foreign exposures met the threshold. But similar-sized banks without those exposures would have been required to hold only 70% of that.

The episode suggests other flaws in the LCR rule. Most important, as noted above, LCR compliance would not have saved the bank alone. The bank’s management would likely have made the same mistake with respect to interest rate risk—it might have replaced its long-dated MBS (HQLA Level 2) with long-dated Treasuries (HQLA Level 1) to improve the LCR, and faced the same mark-to-market losses and breakdown in confidence when interest rates rose.

Indeed, the proximate cause of the depositors’ run was SVB’s sale of its portfolio of available-for-sale Treasuries, on which it realized losses, creating the need to raise new capital. It also financed its long-dated HQLAs—mostly agency mortgage-backed securities—with the FHLB; but the FHLB would stop funding the bank if realized losses turned its tangible equity negative (reportedly, there were also operational delays at the FHLB). Underwater HQLAs proved difficult to sell or raise cash against.

The lesson is that securities with mark-to-market losses are not perfectly liquid. But the LCR does not distinguish between short- and long-dated securities, or between securities with unrealized losses and securities trading at par. Perhaps the LCR needs a new approach to held-to-maturity securities, or a penalty for assets that you can't sell without a loss. Alternatively, the LCR could require banks with concentrated uninsured deposits to hold a portion of their HQLA in reserve balances and short-term Treasuries. There are many options to insert maturity and potential losses into the calculation.

The broader lesson is that regulators need to take a holistic approach to the risks banks face, rather than bucketing one set of rules for liquidity and another set of rules for solvency.

Thank you to Carey Mott for research assistance.

[1] Note that this piece focuses on SVB. A similar analysis of First Republic Bank suggests it also would have been out of compliance with the LCR if it had been required to meet it. Its 10-K for 2022 notes that, although the LCR didn’t apply, the bank had $26 billion in high-quality liquid assets. But that would be their HQLA ignoring the haircuts and cap on Level 2 assets that the LCR rule imposes. Based on the rule, its HQLA would have been about $10 billion. Meanwhile, First Republic had $176 billion in deposits, of which about one-third was insured; $51 billion in commitments; $10 billion in short-term FHLB commitments; and minimal inflows. Assuming a 3% drawdown for insured deposits and 10% for uninsured deposits (generously) gets an LCR of roughly 50%, before the 70% adjustment for banks with less than $250 billion in assets.

Figure 1: Global LCR trends for global systemically important banks

Figure 2: Calculations

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• Informa Connect

SVB’s failure: A case study in the mismanagement of duration risk

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What went wrong for silicon valley bank industry expert clive corcoran goes through the books to identify what red flags could have been spotted..

The collapse of Silicon Valley Bank in California (SVB) in early March 2023 was a case study in how a large bank – the 16 th largest in the US – totally mismanaged interest rate risk.

The bank had a very large portfolio of long duration US guaranteed securities (mainly Treasury bonds) which had been purchased when interest rates were extraordinarily low. As interest rates – on a global basis – have been increasing rapidly, the mark-to-market value of these securities has been dropping precipitously. To take a rather striking example, a US 10-year Treasury note with an annual coupon payment of 0.625% and which was auctioned in August 2020 with a maturity date in mid-2030, has a mark-to-market value in mid-April 2023 of only around 80% of its $100 par value. Many long-term Treasury instruments which were issued during 2020 and 2021 had exceptionally low coupons reflecting historically unprecedented conditions in government bond markets. Some even longer duration issues (for example, 30-year US Treasury bonds) are currently priced closer to 60% of par.

The critical issue for holders of such bonds is whether and how to recognize these mark-to-market write-downs. The accounting treatment regarding this matter is rather complex and hinges on the way that banks, for example, elect to classify these bond exposures. For example, if a bank is holding the 2030 maturity bond just cited in its Trading Book, then it should, for regulatory purposes, be marked to market on a daily basis, and the unrealized loss will directly impact the balance sheet and regulatory capital.

On the other hand, under global accounting rules (IFRS 9), if the bond is designated as held-to-maturity this allows the bank to hold the bond on its balance sheet on an amortized cost basis – the current mark-to-market unrealized loss does not directly impact the balance sheet. The more interesting cases arise in connection with bonds that have been designated as Available for Sale (AFS). The accounting treatment here is more nuanced and varies between a bank’s size and also varies between different jurisdictions. For example, in the United States, the very largest banks (with balance sheets in excess of $700 billion) are required to recognize the full impact of the unrealized losses on AFS securities for regulatory capital purposes. Other US banks have been allowed to show the unrealized loss in the equity section of their balance sheets, under what is known as Accumulated Other Comprehensive Income (AOCI). This AOCI opt out provision, which smaller and medium sized US banks took advantage of, means that any unrealized loss is not a charge against regulatory capital, and only a charge against accounting capital if the mark-to-market loss is realized by selling the security. European banks have not been provided with this opt-out.

Some of the more problematic issues which surround this topic relate to the feasibility of the hold-to-maturity (HTM) designation. There are IFRS rules regarding a bank’s decision to transition away from classifying its holdings, from HTM exposures, to an AFS or Trading book exposures and thereby having to recognize the impairment of its assets. The impairment is not related to credit risk in the case of US Treasury instruments but based purely on the duration issue.

One of the troubling consequences for SVB arose from its failure to hedge the mark-to-market write-downs on its substantial holdings of US Treasury securities. The unrealized losses on these holdings – despite the favourable accounting treatment around the fact that these were mostly HTM exposures – hit the balance sheet with a vengeance when SVB depositors withdrew more than $40 billion in a few hours (itself a remarkable event) and the bank became illiquid and then insolvent.

Just two of the unresolved matters arising from SVB’s demise, relate to the questionable nature of the HTM classification and the status of uninsured deposits. It has been estimated that more than 90% of SVB’s deposits were above the FDIC threshold level for insurance of $250,000 and the policy response to revising this, in the US, has been ambiguous and not adequately resolved.

In some ways, even more serious is an increasingly expressed view regarding the HTM classification. The criticism is that it is a fiction to carry a bond at historic cost based on the idea that if held until the end of its lifetime, it will then redeem at par which suggests that the holder is not subject to any capital loss. To appreciate that this is a pretence, consider the present value of the $100 par/redemption payment for a 10-year bond with a discount rate being applied of 4%. The present value, in other words the purchasing powers 10 years hence, is about $67 in today’s terms. The other problem is, of course, the problem that hit SVB – even if banks are classifying their Treasury holdings as HTM what happens when the bank, in an attempt to remain as a going concern, is forced to sell the holdings and recognize the mark-to-market write-down.

Meet Clive Corcoran

For the opportunity to meet Clive and learn from his 30 years of experience, join the Measuring, Managing & Monitoring Interest Rate Risk taking place in London from the 26-28 June, 2023. The course is CPD-certified and you will receive an IFF exclusive digital badge upon completion of the course. See you in London!

Dates: 26 – 28 June 2023

Venue: 240 Blackfriars, London, SE1 8NW

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Silicon Valley Bank: A Failure in Risk Management

What drove the collapse of svb insufficient board oversight, incomplete modeling and poor liquidity risk management practices were among the key factors that led to the bank’s demise..

Tuesday, March 14, 2023

By Clifford Rossi

As someone who had a front-row seat at the largest bank failure in U.S. history, Washington Mutual, the demise of Silicon Valley Bank (SVB) brings back memories of how seemingly well-run banks can in an instant run into trouble due to unexpected events that catch these firms off guard. As in the case of Washington Mutual, poor governance and management of key risks sealed SVB’s fate.

Although the business models for SVB and WaMu were very different (SVB catered to the venture capital crowd and tech companies, while WaMu focused primarily on the home loan business), they both were far too concentrated in one sector. SVB probably never imagined it could experience a run of $42 billion in a single day , accounting for about one-quarter of all deposits at the bank.

So, what happened to cause SVB to be abruptly taken over by the FDIC?

Anatomy of SVB’s Failure

We now have a better glimpse inside as to what brought SVB down. Technically, the bank failed due to a liquidity crisis – i.e., a lack of sufficient cash inflows to sustain it during a period of significant cash outflows.

Think about getting in your car to go to work and you hear a clunk, and the car just stops running. The mechanic tells you that you’ll have to replace the transmission for $5,000. Your heart sinks as you realize your checking account has $100 in it, your credit cards are maxed out and your family and friends won’t extend you any credit. That’s a personal liquidity crisis. Magnify that by billions and you get the idea of what SVB was dealing with when a good part of its depositor base evaporated.

Clifford Rossi

One of the risks it seems SVB didn’t account for was the degree and speed by which its depositors would withdraw money from the bank upon hearing that SVB was experiencing a “cash burn” that required them to raise capital in an attempt to shore up losses from sales in investment securities that are held in the available-for-sale (AFS) part of the balance sheet. That announcement spooked investors and sent the stock spiraling down, precipitating the largest bank run of all time.

How did SVB get into this position? After all, it touted that it had solid risk management practices and effective controls in its financial disclosures. It turns out, however, that things aren’t always what they seem on the surface.

The company made several risk management blunders. The first was in placing large bets on Treasury bonds back when interest rates were low. Bank balance sheets split assets into two groups, AFS – or those assets that firms expect to transact over some time – and held-to-maturity (HTM) assets that are expected to be held for long-term investment purposes. HTM assets are held at book values while AFS assets are marked-to-market according to fair value accounting principles.

At the end of 2022, SVB reported $120 billion of investment securities , representing 55% of its assets – or more than double the average of all U.S. banks. Furthermore, HTM securities (largely in U.S. Treasuries and mortgage-backed securities) comprised three-quarters of its investment portfolio.

While Treasuries and MBS are very safe investments from a credit risk perspective, they pose substantial interest rate risk. The weighted average duration of these investments was about six years, implying that if interest rates rose by 100 basis points (1%), the value of those securities would decline by 6%. In a low-yield environment prior to the Fed’s rate hiking plan, the quest to ride the yield curve for income was very much in focus by banks, including SVB.

The strategy was to invest a significant amount of deposits in the HTM portfolio where the investments would not have to be marked-to-market. However, the AFS side of the portfolio is subject to reporting unrealized gains or losses as a result of changes in the valuations of those assets that remain on the balance sheet.

As interest rates rose quickly in 2022, the value of those assets declined, as bond portfolios, yields and prices moved inversely. SVB had to do something to stop the bleeding as those unrealized gains hit against the balance sheet – specifically, in equities, via accumulated other comprehensive income or loss (AOCI).

It turns out that unrealized losses, when reported under AOCI, do not affect a bank’s regulatory capital but will impact its nonregulatory total common equity (TCE) ratio. SVB’s TCE ratio was severely dented by the steady unrealized losses it was sustaining, and the bank was therefore forced to sell its AFS assets at a loss, igniting the stampede to withdraw deposits once the word got out.

SVB maintained in its regulatory filings that it conducted regular and sophisticated market risk analysis and interest rate risk hedging activity. However, the amount of interest rate hedging was quite small in comparison with its AFS investments. (As of the end of 2022, SVB had reported only $550 million in notional value of interest rate derivatives as interest rate hedges.)

Clearly, the bank’s risk modeling didn’t anticipate the combination of interest rate and liquidity risk shocks it would face. Indeed, it seems apparent now that SVB’s liquidity risk management practices were deficient.

Best-practice banks typically employ a number of methods – including contingency liquidity planning scenario exercises – to understand the sensitivity of their liquidity risk profile to various shocks. The largest banks (north of $250 billion in assets) go further and are required by the Fed to calculate the amount of high-quality liquid assets (HQLA) as a percent of stress net cash out flows over a 30-day horizon, referred to as the liquidity coverage ratio (LCR). These banks also have to calculate a similar ratio over a one-year horizon on the stability of their funding.

However, in the end, even if SVB had technically been compliant with LCR (we’ll never know, since they weren’t large enough to require LCR compliance), the size of the bank run would likely have resulted in the same outcome.

Poor Risk Oversight

Compounding SVB’s problems was an apparent lack of risk management oversight by the board and the risk team. SVB had a risk committee charter documenting all the components of risk management that should be in place to manage risk effectively. So, clearly, there was a disconnect between what they said on paper and their actions.

SVB was without their senior most risk officer for about eight months in 2022 and only in January brought a new chief risk officer on board. That leadership gap could have left the board and the risk management team in the dark on emerging risk in the portfolio, and may have ultimately resulted in the poor strategy and practices that were put in place to manage SVB’s market and liquidity risks.

Another major issue that is pervasive across banking is the lack of risk expertise represented on bank boards. The vast majority of bank boards today are not equipped to challenge management on risks affecting the enterprise.

Only one of the seven board members assigned to SVB’s risk committee, for example, had any background remotely related to risk management. Moreover, according to the information provided on SVB’s 2023 proxy statement , none of the committee members ever held a senior risk management role, such as CRO.

Without proper experience, how can boards ask the right questions of management regarding threats and mitigation strategies, given the technical complexities of bank risks?

SVB’s stunning collapse is a reminder that despite our best efforts to regulate the banking sector following the 2008 financial crisis, banks can and will fail from time to time. In the case of SVB, the bank’s ultimate demise was fueled by unusual confluence of events: over-concentration in a volatile sector, and poor investment strategy, risk management practices and board risk oversight.

As we’ve seen with the closure of Signature Bank , concerns voiced by regulators over buildups of unrealized losses at many banks (because of rapidly rising interest rates on fixed-income investments) are legitimate.

U.S. regulators took a step in the right direction toward curtailing contagion when they committed to backing depositors at both SVB and Signature Bank . But they also need take a closer look, longer-term, at the effectiveness of oversight at bank boards and at the overall ability of banks to manage complex and integrated risks competently.

Clifford Rossi (PhD) is a Professor-of-the-Practice and Executive-in-Residence at the Robert H. Smith School of Business, University of Maryland. Before joining academia, he spent 25-plus years in the financial sector, as both a C-level risk executive at several top financial institutions and a federal banking regulator. He is the former managing director and CRO of Citigroup’s Consumer Lending Group.

Silicon Valley Bank: A Failure in Risk Management Mar 14, 2023

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What Was Silicon Valley Bank?

Why did silicon valley bank fail.

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What Happened to Silicon Valley Bank?

Silicon Valley Bank (SVB) was shut down in March 2023 by the California Department of Financial Protection and Innovation. Based in Santa Clara, California, the bank was shut down after its investments greatly decreased in value and its depositors withdrew large amounts of money, among other factors. Later in March, First Citizens Bank bought up all deposits and loans of the failed bank.

Bank failures like this have happened before—there were more than 550 banks shut down between 2001 and the start of 2023. But this one was particularly noteworthy. Not only did it come at a time when many people in the U.S. already feared a recession, but it was also the largest bank to fail since Washington Mutual closed its doors amid the financial crisis of 2008.

To help you understand what exactly went wrong with Silicon Valley Bank, we’ll dive a bit deeper into the history of the bank, the events leading up to the collapse, and what it means for depositors, investors, and the economy in general.

Key Takeaways

• Silicon Valley Bank (SVB)—the 16th largest bank in the United States—was shut down by federal regulators on March 10, 2023.
• The bank’s failure came as a result of several factors, including its investments losing value and its depositors withdrawing large amounts of money. According to report by the Federal Reserve, blame was ultimately attributed to the bank's management, the regulator, and social media.
• In the aftermath of the collapse, federal regulators promised to make all depositors whole, even for those funds that weren’t protected by the Federal Deposit Insurance Corporation (FDIC).
• The Federal Reserve took steps following the collapse of SVB to improve confidence in the banking system and prevent future banking failures, including its Bank Term Funding Program.
• First Citizens Bank struck a deal with the FDIC to buy SVB's deposits and loans, in addition to certain other assets.

Silicon Valley Bank (SVB), a subsidiary of SVB Financial Group, was the 16th largest bank in the United States. The bank had assets of about $209 billion in December 2022.

Silicon Valley Bank provided business banking services for companies at every stage, but it was particularly well-known for serving startups and venture-backed firms. According to the company’s website, 44% of the venture-backed technology and healthcare initial public offerings (IPOs) in 2022 were clients of Silicon Valley Bank.

History of Silicon Valley Bank

During a poker game, Bill Biggerstaff and Robert Medearis came up with the idea for Silicon Valley Bank. And in 1983, the two, along with the bank’s CEO Roger Smith, opened the first branch in San Jose, California. It went public in 1988 and, in 1989, moved to Menlo Park in an effort to cement its presence in the venture capital world.

Silicon Valley Bank eventually grew to be one of the largest commercial banks in the U.S. It saw major growth during and after the pandemic between 2019 and 2022, when it nearly tripled in size, rising in the ranks from the 34th largest bank to the 16th.

Silicon Valley Bank saw massive growth between 2019 and 2022, which resulted in it having a significant amount of deposits and assets. While a small amount of those deposits were held in cash, most of the excess was used to buy Treasury bonds and other long-term debts. These assets tend to have relatively low returns but also relatively low risk .

But as the Federal Reserve increased interest rates in response to high inflation, Silicon Valley Bank’s bonds became riskier investments. Because investors could buy bonds at higher interest rates, Silicon Valley Bank’s bonds declined in value.

As this was happening, some of Silicon Valley Bank’s customers—many of whom are in the technology industry—hit financial troubles, and many began to withdraw funds from their accounts. 

To accommodate these large withdrawals, Silicon Valley Bank decided to sell some of its investments, but those sales came at a loss. SVB lost $1.8 billion, and that marked the beginning of the end for the bank.

Some people believe that Silicon Valley Bank’s failure started far earlier with the rollback of the Dodd-Frank Act , which was the major banking regulation that was put into effect in response to the financial crisis of 2008.

As a part of Dodd-Frank, banks with more than $50 billion in assets would be subject to additional oversight and rules. But the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, signed into law by President Donald Trump, significantly changed that requirement. Instead of setting the threshold at $50 billion, the 2018 law increased it to $250 billion.

Despite being the 16th largest bank in the country, Silicon Valley Bank didn’t have enough assets to be subject to the extra rules and oversight. If the threshold was never changed, SVB would have been more closely watched by regulators.

In a report issued on April 28, 2023, the Federal Reserve formally attributed blame for the bank's failure to SVB's senior management team for mismanaging the investment risk of their balance sheet as well as the board of directors for not performing its duty as a check on senior management. Additionally, the Fed also attributed some responsibility to its own regulatory officials for not recognizing the bank's vulnerabilities as it rapidly grew between 2019 and 2021 and for not acting on significant problems it did identify related to risk management before the bank failed. The Fed also cited the 2018 change in Fed supervisory standards and the impact of social media with a highly networked and concentrated depositor base as contributing factors.

A Timeline of the Collapse

From an outside perspective, the failure of Silicon Valley Bank happened rapidly over the span of just a couple of days. Here’s a timeline of events:

• March 8: Silicon Valley Bank announced its $1.8 billion loss on its bond portfolio, along with plans to sell both common and preferred stock to raise $2.25 billion. In the aftermath of this announcement, Moody's downgraded Silicon Valley Bank’s long-term local currency bank deposit and issuer ratings.
• March 9: The stock for Silicon Valley Bank’s holding company, SVB Financial Group, crashed at the market opening. Other major banks also saw their stock prices take a hit. Additionally, more SVB customers began withdrawing their money, for a total attempted withdrawals of $42 billion.
• March 10: Trading was halted for SVB Financial Group stock. Before the bank could open for the day, federal regulators announced they would take it over. After regulators were unable to find a buyer for the bank, deposits were moved to a bridge bank created and operated by the FDIC, with a promise that insured deposits would be available by Monday, March 13.
• March 12: Federal regulators announce emergency measures in response to the Silicon Valley Bank failure, allowing customers to recover all funds, including those that were uninsured.
• March 17: Silicon Valley Bank's parent company, SVB Financial Group, filed for bankruptcy .
• March 26: First Citizens Bank bought all of Silicon Valley Bridge Bank except for $90 billion of securities and other assets that remained in FDIC receivership.

HSBC Holdings Plc announced on March 13 that it would buy the U.K. arm of the company, Silicon Valley Bank UK Limited, for 1 pound.

Impact on Depositors and Investors

The FDIC insures bank deposits of up to $250,000 per depositor per bank for each account category. In other words, if you had $250,000 in a Silicon Valley Bank account, you would get all of your money back.

Unfortunately, most of the accounts in Silicon Valley Bank held more than $250,000 of deposits, meaning most of the funds were uninsured. In most cases, this would mean account holders would lose any money above that threshold.

To help, the Federal Reserve announced on March 12 that it would invoke a systemic risk exception, meaning that all depositors would be made whole , even for those funds that were uninsured.

However, investors won’t be so lucky. While the FDIC can protect depositors from losses, it can’t do the same for shareholders and unsecured debt holders. In other words, individuals and institutions that owned stock in SVB Financial Group may not get their money back.

Why Did the Government Promise to Make SVB Depositors Whole?

Federal regulators decided to fully insure and protect all of Silicon Valley Bank’s depositors and their balances for fear of contagion—the impact the bank’s collapse could have on the economy as a whole.

Amid the bank collapse, it was not just Silicon Valley Bank whose stock price plummeted. Other banks saw their stock prices drop too.

A high-profile bank failure like this one could reduce consumer confidence in the banking system. That lack of confidence could create more of the problem that contributed to Silicon Valley Bank’s failure—account holders rushing to withdraw deposits from a bank that doesn’t have the funds to cover them.

Ultimately, this risk of contagion could affect not just banks but the economy as a whole.

Who Paid for the Rescue?

When news spread of regulators’ decision to make all depositors whole, many immediately wondered what that would mean for taxpayers.

When the Federal Reserve made its announcement, it clarified that none of the losses would be taken on by taxpayers. Instead, the money will come from the FDIC, which is the agency tasked with insuring bank deposits. The money the FDIC uses to cover those losses comes from quarterly premiums that all insured banks pay to the agency.

The FDIC estimated on March 26, 2023, that the cost of the failure of SVB to its Deposit Insurance Fund would be about $20 billion.

But it would be too simplistic to say none of the losses will be borne by taxpayers. 

While you may not pay for the losses directly with your tax dollars, some losses could ultimately trickle down. For example, if your bank has to pay more for deposit insurance, it might charge you a higher interest rate on a loan or pay you a lower percentage of interest in your savings account.

In the lead-up to the Silicon Valley Bank collapse, the Federal Reserve and other central banks had been increasing interest rates as a way to fight global inflation. But after the failure of SVB, Signature Bank, and Silvergate Capital, the Fed's next rate increase was lower than expected prior to the bank failures.

As a result of the Silicon Valley Bank collapse, the government announced the Bank Term Funding Program (BTFP) , a program authorized by the Federal Reserve that offers loans to banks, credit unions, and other deposit institutions.

These loans, which can last for up to one year, help financial institutions to meet their depositors' needs. The program also helps to ensure that, when banks need cash, they won’t be forced to quickly sell high-quality securities to get it.

The program went into effect on March 12, 2023, and will be in effect until at least March 11, 2024.

What Happens to Your Money If the Bank Collapses?

If your bank collapses, your money should be protected. Nearly all banks are protected by FDIC insurance, which covers up to $250,000 per depositor per account ownership category. If the FDIC can’t find a healthy buyer for the bank, it will pay depositors the money that was in their account. However, if your account balance exceeds $250,000, you may not recover the full amount.

Are Credit Unions Safer Than Banks?

Credit unions aren’t necessarily safer than traditional banks—they are simply a not-for-profit alternative. As an account holder, your money is just as safe in either type of account. Just as the FDIC insures bank deposits of up to $250,000, the National Credit Union Administration (NCUA) does the same for credit union deposits.

Who Owned Silicon Valley Bank?

Silicon Valley Bank was founded in 1983 by Bill Biggerstaff, Robert Medearis, and Roger Smith and was a subsidiary of SVB Financial Group, which is a publicly-traded company ( SIVB ).

It was bought by First Citizens Bank on March 26, 2023.

Who Were the Main Investors in Silicon Valley Bank?

SVB Financial Group, the parent company of Silicon Valley Bank, is primarily owned by institutional investors. The largest shareholders include:

• The Vanguard Group, Inc.
• SSgA Funds Management, Inc.
• BlackRock Fund Advisors
• Alecta Pension Insurance Mutual
• JPMorgan Investment Management, Inc.

The collapse of Silicon Valley Bank in March 2023 represents the largest bank failure since the financial crisis of 2008. And given the already-present fears of a recession, the collapse further shook consumer confidence in the economy.

The bank’s failure served to remind us that there are several weaknesses within the banking system, including the lack of oversight for banks with less than $250 billion in assets.

Thankfully, federal regulators responded quickly to the collapse of SVB, implementing several measures to reduce depositors’ losses and renew confidence in the banking system and the economy overall.

Correction—April 21, 2023: A previous version of this article incorrectly referred to the first CEO of Silicon Valley Bank as Robert Smith. The correct name is Roger Smith.

Federal Deposit Insurance Corporation. " Bank Failures in Brief – Summary 2001 Through 2023 ."

Federal Deposit Insurance Corporation. " Status of Washington Mutual Bank Receivership ."

Federal Reserve. " Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank ."

Federal Reserve Statistical Release. " Large Commercial Banks; As of December 31, 2022 ."

Silicon Valley Bank. " Venture-Funded ."

Silicon Valley Bank. " Silicon Valley Bank Celebrates 20 Years of Dedication to Entrepreneurs ."

Federal Reserve Statistical Release. " Large Commercial Banks; As of December 31, 2019 ."

SVB Financial Group. " SVB Financial Group Announces Proposed Offerings of Common Stock and Mandatory Convertible Preferred Stock ."

Congressional Research Service. " The $50 Billion Threshold in the Dodd-Frank Act: Key Findings ."

U.S. Congress. " S.2155 - Economic Growth, Regulatory Relief, and Consumer Protection Act: Abstract ."

Moodys. " Rating Action: Moody's Downgrades SVB Financial Group (Senior Unsecured to C From Baa1) and Will Withdraw the Ratings ."

Reuters. " Silicon Valley Bank Scrambles to Reassure Clients After 60% Stock Wipe-Out ."

Department of Financial Protection and Innovation, State of California. " In the Matter of Silicon Valley Bank: Order Taking Possession of Property and Business ."

Yahoo Finance. " SVB Financial Group (SIVB) ."

Board of Governors of the Federal Reserve System. " Joint Statement by Treasury, Federal Reserve, and FDIC; March 12, 2023 ."

Federal Deposit Insurance Corporation. " FDIC Creates a Deposit Insurance National Bank of Santa Clara to Protect Insured Depositors of Silicon Valley Bank, Santa Clara, California ."

Cision PR Newswire. " SVB Financial Group Commences Chapter 11 Proceeding to Preserve Value ."

Federal Deposit Insurance Corporation (FDIC). " First-Citizens Bank & Trust Company to Assume All Deposits and Loans of Silicon Valley Bank N.A., From the FDIC ."

HSBC Holdings plc. " HSBC Acquires Silicon Valley Bank UK Limited ."

Federal Deposit Insurance Corporation. " Deposit Insurance FAQs ."

Federal Deposit Insurance Corporation. " Financial Products That Are Not Insured by the FDIC ."

Federal Deposit Insurance Corporation. " Deposit Insurance Fund ."

Federal Reserve. " Semiannual Monetary Policy Report to Congress ."

Federal Reserve. " Open Market Operations ."

Board of Governors of the Federal Reserve System. " Bank Term Funding Program ," Pages 1-2.

Federal Deposit Insurance Corporation. " When a Bank Fails - Facts for Depositors, Creditors, and Borrowers ."

National Credit Union Administration. " What Is a Credit Union? "

CNN Business. " SVB Financial Group: Shareholders ."

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Climate tech fundraising remains steady; silicon valley bank releases annual climate tech report.

As a sign of stabilization in US venture capital, findings show long-term tailwinds behind climate tech

SAN FRANCISCO , May 14, 2024 /PRNewswire/ -- With 88% of global carbon emissions now covered by a net-zero goal, climate tech has outperformed and investors remain committed to the sector, according to a new report from Silicon Valley Bank (SVB), a division of First Citizens Bank. While overall venture capital (VC) fundraising and deal activity in 2023 saw a 24% decline from 2021, climate tech is only 14% below 2021 results, with several individual subsectors like carbon tech and climate data showing signs of growth.

"With steady fundraising and an increase in funds and firms investing in the sector, the groundwork has been laid for ongoing support and investment in climate technology solutions," said Dan Baldi , national head of SVB's Climate Technology and Sustainability practice. "Amid the growing presence of climate risks, technologies geared toward mitigating these hazards are positioned for growth as a necessity."

Leveraging SVB's proprietary data and insights, the 2024 Future of Climate Tech Report reveals the outlook on climate tech and the broader innovation economy. Amid a substantial contraction in the innovation economy, climate tech has shown notable resilience despite an overall drop in VC funding. While deal activity has stayed robust compared to other sectors, invested capital has decreased by over 50%, primarily due to a decline in deals exceeding $100 million .

SVB's Future of Climate Tech report provides an in-depth look at current fundraising activity and challenges, macro trends and emerging technologies. The 2024 report also analyzes four themes shaping the future of climate technology:

• Startups have less capital available : Lower VC investment, higher interest rates, and low valuations all increase capital costs making it harder for companies to finance their operations. As a result, most companies must focus on plotting a path to profitability and efficiency to ensure the runway doesn't come up short.
• Incentives matter to climate tech : Tax credits have jump-started the carbon capture market, prompting 427 new CCUS project announcements in the last two years.
• Hard-to-mitigate emissions are in focus : As incentives gain traction, VC growth is expected to continue to promising technologies such as industrial heat, SAFs and green cement and steel, and cleaner baseload power.
• Sector posed for exit activity : Exit windows are mostly closed reflecting the overall market. Poor performance from recent SPACs and IPO, high interest rates, and continuing uncertainty has hampered public exits.

Key 2024 Report Findings:

Climate tech fundraising remains resilient

• While overall venture capital fundraising in the US hit a six-year low, climate tech fundraising has remained steady, settling at a level similar to 2020. Among the most active CVCs, climate tech now accounts for 11% of deals up from 2% in 2020.

Companies are running low on cash

• The decline in investment, coupled with climate tech's capital-intensive business models, have left 60% of climate tech companies with less than 12 months of cash runway, relative to 53% for all tech companies. As a result, companies are putting a greater emphasis on profitability. Seventy-six percent of climate tech software companies are seeing improvements in EBITDA margin year-over-year and 65% of climate tech hardware companies are also seeing gains.

Climate tech enjoys long-term tailwinds

• About 88% of global carbon emissions are subject to a net-zero goal. Appetite for climate tech solutions continues to increase and advancements have brought down the costs of sustainable technology. It is now cheaper to develop new renewable energy than to stick with fossil fuels.

Learn More To read the complete Future of Climate Tech report, click here: The Future of Climate Tech Report | Silicon Valley Bank (svb.com)

SVB is a leader in providing market insights on sectors across the innovation economy. For the complete library of SVB's signature reports, please visit Market Research Industry Trends & Insights | Silicon Valley Bank (svb.com)

About Silicon Valley Bank Silicon Valley Bank (SVB), a division of First Citizens Bank, is the bank of some of the world's most innovative companies and investors. SVB provides commercial banking to companies in the technology, life science and healthcare, private equity and venture capital industries. SVB operates in centers of innovation throughout the United States , serving the unique needs of its dynamic clients with deep sector expertise, insights and connections. SVB's parent company, First Citizens BancShares, Inc. (NASDAQ: FCNCA ), is a top 20 U.S. financial institution with more than $200 billion in assets. First Citizens Bank, Member FDIC. Learn more at svb.com

SOURCE Silicon Valley Bank

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