The Silicon Valley Bank (SVB) Collapse Explained

Silicon Valley Bank (SVB), which had been in business for nearly 40 years, collapsed in just 36 hours after a bank run. As financial markets reel from the shock, Credit Suisse has also reported a liquidity crisis, and the financial system as a whole looks unstable.

What Is SVB?

Based in Silicon Valley in the US, SVB served mainly startups and venture capital firms, and it was the 16th-largest commercial bank in the US by assets.

Its total assets reached $209 billion as of December 2022, and it enjoyed a huge boom during the low-interest-rate era. Its deposits more than tripled, from $49.3 billion in 2019 to $189.2 billion at the end of 2021.

SVB used this flood of money to buy securities, most of which were MBS and US Treasuries with maturities of 10 years or more. As of the end of 2022, about 56% of its total assets were held in securities, which was also a bet that interest rates would stay low for a long time.

The Collapse of SVB

So why did SVB collapse? SVB had a basic weakness in how its deposits were made up. It overlooked the fact that money that had poured in during the ultra-low-rate period could just as easily flow back out, and its asset management, built around long-term bonds, became a problem.

Even though SVB held top-quality US Treasuries, it could not absorb the massive losses caused by rapid interest rate hikes. Once the bonds were sold, those losses became realized losses, and its liquidity dried up even further. At the end of 2022, SVB's unrealized losses had reached $15.1 billion.

In the end, as bank runs continued after the Fed's rapid rate hikes, SVB was ordered closed by financial regulators. As a result, the collapse of Silicon Valley Bank (SVB) went down as the second-largest bank failure in US history.