The SVB/Signature Story: What Went Wrong and How to Avoid a Repeat
On March 16, 2023, Silicon Valley Bank (SVB) became the second-largest bank failure in U.S. history. SVB’s collapse, and the subsequent failure of Signature Bank SBNY, have left many wondering what went wrong and how to prevent a similar bank panic in the future. To answer these questions, we must look at the decisions made by SVB’s management that led to their downfall.
SVB grew quickly during a time when the Federal Reserve (Fed) was engineering a low-interest-rate environment. The bank took in massive amounts of new short-term deposits and invested heavily in government bonds. When the Fed began to fight inflation by raising interest rates, SVB had failed to hedge against that risk, leading to significant losses on its bonds. This made it increasingly difficult for SVB to pay its depositors, who then panicked and began withdrawing their funds.
The problem was compounded by the fact that SVB had invested in long-term U.S. Treasuries, which did not yield as much as newer bonds on the market. When pressed for cash, SVB had to sell its bonds, yielding less money than newer bonds, resulting in additional losses. This created a gap between the yields of SVB’s bonds and those sold during the Fed’s tightening cycle, creating a net loss on SVB’s balance sheet.
The mounting losses caused SVB’s depositors to become increasingly skittish and flee the bank. SVB was unable to raise enough capital to meet the redemptions and the Federal Deposit Insurance Corporation (FDIC) stepped in and took over the bank’s operations.
The SVB/Signature story illustrates how quickly a seemingly solid institution can go bust when key decisions are made without proper consideration for the risks involved. Banks must hedge against the risk of inflation by investing in assets that can quickly be converted to cash when needed, such as short-term securities, and the FDIC must ensure that banks have enough cash reserves to meet their obligations. In addition, the Fed must take a more measured approach to fighting inflation by recognizing the risks associated with sudden, sharp shifts in economic conditions. If the Fed had done so, the SVB/Signature failure could have been prevented.
0. “Opinion | In the Silicon Valley Bank debacle, greed and fear ruled, not the rules” The Washington Post, 15 Mar. 2023, https://www.washingtonpost.com/opinions/2023/03/15/silicon-valley-bank-greed-fear
1. “Silicon Valley Bank failed because it bet the money printer would never stop” Washington Examiner, 15 Mar. 2023, https://www.washingtonexaminer.com/opinion/silicon-valley-bank-failed-because-it-bet-the-money-printer-would-never-stop
2. “Wall Street’s Gambling Addiction” The Catalyst, 17 Mar. 2023, https://thecatalystnews.com/2023/03/17/wall-streets-gambling-addiction/