Scenario-planning could have saved Silicon Valley Bank

Silicon Valley Bank collapsed within 36 hours and US federal regulators seized control. In that time, the bank’s stock fell over 60% and a $42bn bank run was sparked. 

Silicon Valley Bank’s (SVB) journey from its founding in 1983 to its collapse in March 2023 mirrors Icarus. At the time of its collapse, it was the 16th-largest bank in the US, and its failure is eclipsed only by that of Lehman Brothers in 2008. 

It took just a day and a half to fall apart. SVB’s abrupt collapse spurred other banking closures, spooked global markets and threatened thousands of tech and life sciences start-ups.

The bank was originally founded to serve fledgling tech companies. Eventually, nearly half of US venture capital-backed tech and life sciences companies would be banking with SVB.  

Companies such as Roblox, Roku and Rocket Lab put millions of dollars into SVB, helping it become one of the largest in the US. Some of these clients would be considered risky and fast-moving, however, and when things started to go wrong, they were quick to withdraw their funds. 

After the banking crisis of 2008, then-president Barack Obama introduced the Dodd-Frank Act, placing tighter regulations on banks. However, some of those restrictions on smaller banks (those with under $250 billion (£201 billion) in assets) were rolled back during the Trump administration. 

It took just a day and a half to fall apart.

SVB fell into that ‘smaller bank’ category, and as such was operating under looser rules. Flooded with cash ($189 billion by 2022) as businesses deposited more during the pandemic, 2021 was SVB’s most profitable year ever. The bank then took that cash and purchased tens of billions of dollars of longer-term US bonds and mortgage-backed securities. While these products are usually safe, this is where its problems began. 

SVB’s securities portfolio rose by $100 billion in under a year, but all of a sudden, interest rates rose.  

When interest rates rise, bond prices tend to fall, and that’s what happened in this case. Very quickly, banks that held a lot of bonds were sitting on some hefty losses. Soon, SVB’s investments were worth $17 billion less than their initial purchase price. Having not been required to stress-test under the looser regulations, this was SVB’s undoing. 

Making matters worse, as interest rates rose, new deposits shrank, falling nearly $30 billion between March and December 2022. The vast majority of the bank’s deposits were held in just 37,000 accounts. Those accounts all had more than $250,000 – the amount insured by the US’s Federal Deposit Insurance Corporation. 

In a filing on 8 March, SVB announced it had sold a large number of its securities at a loss of $1.8 billion to help it cover the fall in deposits. That announcement rattled the markets, and the bank’s stock fell. Start-up executives began receiving urgent calls from concerned investors and the run on the bank began. In just 36 hours, $42 billion had been withdrawn by customers. SVB ran out of cash. 

The key lesson in all this is to challenge assumptions as much as possible, and regularly engage in scenario planning. SVB’s fatal mistake was assuming that bonds and securities are always safe and would not fall in price, thus over-committing to them and sealing its fate.

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.