March 2023·Intermediate
In short
Silicon Valley Bank failed in 48 hours in March 2023 after it announced a capital raise to cover bond losses. Depositors withdrew about $42 billion in a day, the FDIC took over, and the episode echoed across US regional banks.
SVB banked startups and venture funds. Its deposits ballooned in 2020 and 2021 as tech funding boomed, and it parked that cash in long-dated US Treasuries and mortgage bonds. When the Federal Reserve hiked rates sharply in 2022, those bonds lost value. SVB had taken a big, unhedged bet on rates staying low.
SVB put short-term deposits (money it could be asked to repay any day) into long-term bonds (assets that lose value when rates rise). The longer the bond, the more sensitive it is to rates. SVB was underfunded for that risk.
Bonds labelled held to maturity do not have to be marked to market in the same way. The losses were real but partly off the headline numbers. When SVB had to sell bonds to raise cash, the losses became visible.
On March 8, SVB said it had sold bonds at a loss of about $1.8 billion and would raise capital. That spooked depositors who had balances above the insured $250,000 limit.
Founders and investors urged portfolio companies to move cash out. About $42 billion left in a single day. SVB could not sell bonds fast enough to honour withdrawals, and California regulators closed it on March 10.
Signature Bank failed next; First Republic followed in May. The Fed set up a Bank Term Funding Program to let banks borrow against bonds at par, and a systemic-risk exception guaranteed even uninsured deposits.
Sales & Trading
Rate hikes crush bond portfolios. The rates desk and risk management are central to what happened.
Investment Banking
The Financial Institutions Group advises banks on capital raises, deposits, and M&A.
Macro
A clean example of how monetary policy transmits into financial stress.
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