Silicon Valley Bank Fails After Run by Venture Capital Customers

Flush with cash from high-flying start-ups, it bought huge amounts of bonds more than a year ago, just before the Federal Reserve began to raise interest rates. Like its peers, Silicon Valley Bank kept just a fraction of the deposits on hand and invested the rest with the hope of earning a return.

In particular, the bank put customer deposits into long-dated Treasury bonds and mortgage bonds which, while interest rates were low, promised modest, steady returns.

That had worked well for years. The bank’s deposits doubled to $102 billion at the end of 2020 from $49 billion in 2018. One year later, in 2021, its coffers were at $189.2 billion as start-ups and technology companies enjoyed heady profits during the pandemic.

When the Federal Reserve began raising rates last year, however, those holdings became less attractive because newer government bonds paid more in interest. That might not have mattered so long as the bank’s clients didn’t ask for their money back.

But at the same time as interest rates were rising, the environment for start-up funding dried up, putting pressure on the bank’s clients — who then began to withdraw their money. To pay those redemption requests, Silicon Valley Bank had to sell off some of its investments at exactly the wrong time. In its surprise disclosure on Wednesday, the bank admitted that it had lost nearly $2 billion when it was all but forced sell some of its holdings.

The upheaval raised uncomfortable parallels to the 2008 financial crisis — the last time a bank of this magnitude unraveled. Then, as now, what had seemed to be a hot economy suddenly cooled, pressuring banks.

“It’s the classic Jimmy Stewart problem,” said Sheila Bair, former chair of the Federal Deposit Insurance Corporation, a primary bank regulator, referring to the actor who played a banker trying to stave off a bank run in the film “It’s a Wonderful Life.” “If everybody starts withdrawing money all at once, the bank has to start selling some of its assets to give money back to depositors.”