What Happened to SVB in Simple Terms

The collapse of Silicon Valley Bank (SVB), a 40-year-old California-headquartered bank that had become a startup tech sector favorite, has shaken the financial world in the past few days.

But what led to such a disastrous outcome for a lender that had established itself as a successful financial institution? At the root of SVB's problems there were ill-fated investment decisions.

The company, which grew to be the 16th-largest bank in the U.S. despite remaining relatively unknown to the public, had a boom during the pandemic years, when the startup tech sector prospered. As more and more homebound people spent money on tech gadgets and similar items, tech companies used SVB to hold their cash, much of it used for payrolls and business expenses.

With its sudden influx of deposits, SVB invested the money—as all banks do. Only a few of a bank's assets are normally kept as cash. SVB decided to invest billions in long-dated U.S. government bonds, including mortgage-backed securities.

These investments didn't look bad back then, as the bank was likely to hold on to the bonds for some time and see them through to maturity. But several recent factors combined to turn these financial decisions into the beginning of SVB's demise.

Last year, the Federal Reserve moved to hike interest rates in an effort to slow down the rate of inflation. As rates rose, the price of SVB's bonds—the mortgage-backed securities—fell, and the bank's bond portfolio lost significant value.

At the same time, the tech sector found itself suddenly struggling last year after two years of growth. The most publicly discussed aspect of this crisis in the tech world was the mass layoffs announced by companies like Amazon, Meta and Microsoft. Tech companies were also increasingly moving to draw on their bank deposits, and for SVB, this meant the beginning of the crisis that quickly brought the bank to its knees.

As more and more SVB's customers asked for some or all of their deposits back, the California bank, short on cash, was forced to sell its bonds for liquidity. It sold a $21 billion bond portfolio, which was a loss-making one for the bank, yielding it an average 1.79 percent—below the current 10-year Treasury yield of about 3.9 percent.

SVB was forced to recognize a $1.75 billion loss after the sale, and on March 8 it announced to investors that it needed to fill this gap by raising capital.

This announcement sent customers and investors into a frenzy, with panic quickly spreading and causing a run on the bank. Bank runs happen when a large number of customers simultaneously ask to withdraw their deposits from a lender over concern it won't be able to pay its long-term debts and financial obligations.

If you've seen the classic Christmas film It's A Wonderful Life, a bank run is the one that unfolds at the Bailey Building and Loan at the beginning of the film, and it is staved off by protagonist George Bailey offering his honeymoon money to depositors.

Bank runs work like self-fulfilling prophecies: even if a bank wouldn't have been insolvent before customers started withdrawing their deposits en masse, as panic spreads and more depositors ask for cash, the bank becomes insolvent.

This is what happened to SVB within about 48 hours last week. On Friday, the bank officially collapsed, forcing the federal government to step in. Just before its failure, the bank reported it had $212 billion in assets. Its collapse is the biggest since the 2008 global financial crisis.

The Biden administration has moved to contain damage and prevent contagion to the wider financial sector, closing a second bank, Signature, on Sunday and promising money back to all SVB depositors, including those who were uninsured. But shareholders of the California bank won't be bailed out by the federal government. SVB can now only be rescued if it is acquired by a larger bank.

UPDATE 03/14/2023 6.30 a.m. EST: This article was updated to make it clear Silicon Valley Bank reported having assets of $212 billion before its collapse.