Abstract
The present case study is based on the recent collapse of Silicon Valley Bank (SVB), a respected bank known for its strong focus on financing start-ups and venture capital firms. The objective is to provide an account of the events that led to the collapse of SVB. The reasons for the collapse are manifolds; including a liquidity crisis triggered by a significant bank run on its deposits by start-up clients, macro-economic factors such as inflation surge and interest rate hikes, Dodd-Frank Act Amendment 2018, corporate governance and risk management issues. The sudden collapse had significant implications for start-up financing, with many start-ups facing a liquidity crisis and some shutting down altogether. The case is analysed with data extracted from SVB financial statements and the Bloomberg database. The findings reveal that Asset liability mismatch, regularity loopholes, aggressive decision-making, specific client concentration and financial market changes are the major reasons for bank failures. The case also provides some important lessons, including the importance of diversification, monitoring financial health, and building strong relationships with the customer base. The subject that this case will fit in is financial statement analysis, corporate finance and auditing.
On one fine morning in March, I was engaging an interactive lecture with my Finance group of MBA students discussing the significance of liquidity in financial institutions. We debated how, even in stable times, maintaining liquidity was essential to safeguard against unforeseen crises. I posed a question to the class, asking, ‘What do you think happens when a bank cannot quickly access enough cash to meet its obligations?’ citing the example of YES Bank from India.
Coincidently, my phone buzzed with a news notification that changed the entire dynamic of the class. Silicon Valley Bank (SVB), the prestigious financial institution known for fuelling the growth of tech start-ups, was in serious trouble. Their clients, primarily start-ups and venture capital firms, had begun pulling their deposits due to fears of insolvency. It was 8 March 2023 and the news headline read, ‘Liquidity Crisis at Silicon Valley Bank: Could This Be the Next Major Bank Collapse?’
I took a deep breath and glanced around the room. I could sense that my students felt the weight of the situation. It seems like a Déjà vu all over again. We were discussing the past when a real-time example of the criticality of liquidity playing out live in one of the world’s largest banks occurred. I quickly shifted gears, setting aside the planned material to dive into this unfolding crisis. ‘Let us explore this situation together’, I said. ‘Imagine you are in the shoes of the chief executive of SVB, what strategies would you implement?’
SVB a leading start-up and venture capital lending financial Institution has supported numerous tech businesses throughout the course of its nearly four-decade history and has grown to be one of the largest banks in Silicon Valley. (Akhtar et al., 2023; Yadav et al., 2023) SVB was renowned for impressive asset growth, credit quality, profitability and stability in the industry. However, due to a sharp drop in value due to rising interest rates, SVB faces a dilemma. The management can attempt to raise capital by selling off assets at a significant loss or try to ride out the crisis and hope for economic conditions to stabilize. Nevertheless, the management is already aware that either choice could impact the reputation, customer base, and stability of the SVB. Finally, on 10 March 2023, the SVB, was shut down (FDIC, 2023). This event is of great significance because it is the largest bank failure since the 2008 financial crisis and the second-largest failure in US history (Azmi et al., 2020; Chang, 2011; Naseema et al., 2024). The financial market plummets drastically creating chaos, with some analysts predicting a potential bank run while others suggesting that it will be a nightmare for start-ups associated with the bank due to the drying up of start-up funding. SVB bank run was not a bank on run rather it was a bank on sprint. It was just a four-hour incident where American regulator FDIC (Federal Deposit Insurance Corporation) and California banking authorities took over the SVB Financial Group’s Silicon Valley Bank (ET online, 2023). The regulator closed SVB and appointed the FDIC as receiver. The FDIC seized the assets of the Bank, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis (Al-Sowaidi & Faour 2023; Alam et al., 2024a). The study examines an account of the events that led to the collapse of SVB. The study examines an account of the events that led to the collapse of SVB and offers practical insights into the importance of diversification and sound financial health monitoring in safeguarding institutions against similar downfalls.
Overview of Silicon Valley Bank
SVB was founded in 1983 and has its headquarters in Santa Clara, California. SVB was ranked the 16th largest US bank and had assets totalling $212 billion before its collapse in 2023 (Aharon et al., 2023; Vo & Le, 2023). In such a short tenure, SVB quickly established itself as a leading financial institution catering specifically to the needs of start-ups and venture capital firms, particularly in high-tech and life sciences industries (Nguyen, 2019). SVB has become synonymous with the innovative spirit and entrepreneurial ethos growing its assets and influence over time; thereby positioning itself as a leading bank for the technology and innovation sectors (Xie, 2021). At its peak, SVB was considered a top-tier and best regional bank among its peers, based on a combination of profitability, growth, shareholder return and leadership. The surge in SVB’s popularity can be attributed to its unique understanding of the start-up ecosystem and its ability to provide tailored financial services This strong niche focus, while initially a strength, ultimately contributed to its vulnerabilities and subsequent collapse (Derby, 2022).
The Rise of Silicon Valley Bank
SVB has established itself as a leading financial institution that empowers start-ups, technology companies, and investors to flourish in the technology industry’s dynamic and competitive environment (Lee, 2000). Through its customised financial services, strategic alliances, and unwavering commitment to innovation, SVB continues to have a significant impact on the entrepreneurial ecosystem, fostering the development and success of innovative technologies. Figure 1 shows the timeline of key events in the history of SVB. As founded in 1983, the major focus was on providing financial services to technology start-ups and venture capital firms. Within a decade, SVB has made their presence in major cities of the USA which leads to becoming a member of the Federal Reserve system in enhancing its ability to provide banking services and access to capital to its client.
The Timeline of Key Events in the History of SVB.
In 2000, SVB went public and was listed on the NASDAQ stock exchange. Later, the 2008 financial crisis had shaken the financial system globally (Lyócsa et al., 2023). In the aftermath of the 2008 financial crisis, the number of bank failures in the United States increased significantly. In 2010, there were 157 bank failures in the United States (Weinberg, 2013). Since then, the US government has introduced various reforms, including Dodd-Frank Wall Street Reform, which introduced new regulations to increase capital and liquidity requirements for banks, as well as to strengthen risk management practises. However, there has been a gradual decline in the number of bank failures. This decline is partially attributable to the implementation of regulatory reforms in the aftermath of the financial crisis. These reforms were intended to strengthen the financial industry and reduce the likelihood of future failures (Kawas & Dockery, 2023; Khan et al., 2024).
Later, in 2018, the government reversed the Dodd-Frank Act 2010 through the Wall Street Reform Act 2018 and deregulated small banks by categorising them into five categories (Berman, 2023). This reform Act liberated small banks from excessive bureaucracy and played an important role in transforming SVB, A category IV bank into the 16 largest banks in Silicon Valley. The Trump administration’s weakening of the Volcker Rule and lower stress test standards have drawn criticism, with some experts attributing these rollbacks to the failures of banks such as SVB. The Volcker Rule, a fundamental component of Dodd-Frank, was created to prohibit banks from using their own capital for proprietary trading, to prevent excessive risk-taking that could lead to another financial disaster (Alam et al., 2024b; Jafar et al., 2023; Zhang, 2023).
Figure 2 depicts the exponential growth of SVBs total assets, growing from a mere $57 billion to $212 billion, registering a whopping fourfold increase from 2018 to 2022. In contrast, the US banking industry reported an overall growth rate of 29% during the same period. The exceptional growth during this period was primarily driven by outstanding client liquidity due to funding events such as initial public offerings, secondary offerings, and other fundraising activities. (Federal Reserve Supervision Report, 2023).
SVB exhibited a significant reliance on corporate and venture capital funding, rather than retail deposits. With over 2,500 venture capital firms banking with SVB and half of all venture-backed startups as its customers, the bank’s integration with the venture capital community is evident. But behind the dazzling success lay vulnerabilities. Despite its rising significance, the asset growth slowed dramatically in 2022 due to a decrease in tech-sector activity (44% of the SVB customer base was VC-backed technology and life sciences companies) triggered by rising interest rates (Board of Governors of the Federal Reserve System, 2023a, b). While SVB is famed as a startup bank, 56% of SVB’s loans were directed to venture capital and private equity firms by the end of 2022, secured by their limited partner commitments. Furthermore, 14% of its loans were mortgaged to affluent individuals and legacy Boston Private clients, while 24% were allocated to various tech and healthcare companies. Notably, 9% of these loans were extended to early and growth-stage startups, whose repayment capabilities are heavily contingent upon their ability to secure additional funding or achieve successful exits (SVB, 2023). SVB’s over-reliance on long-term securities becomes a ticking time bomb as interest rates rise, driving down the value of its assets.
SVB’s Distinctive Position in Comparison to Peers
SVB distinguishes itself from its peer Large Banking Organizations (LBOs) through a technology-focused business model and demonstrating superior growth in funding composition exhibited in Figure 3. The comparison of key metrics of SVB with average peer LBOs holdings manifests the superior performance of SVB. Lending is a core business activity for banks and financial institutions. Loans are the primary source of revenue for these entities, SVBs loan to total asset statistics show more than half a percentage of total peer LBO holdings. Statistics securities as a percentage of total assets indicate the composition of the institutions’ investment portfolio. As depicted in Figure 3, 55% of SVB assets are constituted from investments in stocks, bonds and other securities. Whereas peer LBO’s average investment stood at 25% of the total assets. SVB’s high proportion indicates resilience in investment for generating revenue. The proportion of held-to-maturity (HTM) securities to total securities is a precise measure utilised to assess the investment approach and risk level of financial institutions. Its main focus is on retaining investments until they reach maturity rather than engaging in active trading. This method advocates a conservative approach focused on consistent income creation and protecting money, rather than pursuing capital gains through trading. Out of total investment in securities, SVB has a substantially high proportion equivalent to 75% investment in HTM securities, whereas LBO keeps this proportion lower to 42 % probably to meet liquid demand. The liability side comparison of SVB with peer LBO is done on two parameters that include Total deposits as a percentage of total liabilities and Uninsured deposits as a percentage of total deposits. Total deposits as a percentage of total liabilities show the percentage of a bank’s obligations that are financed by customer deposits. Deposits serve as a significant source of funding for banks’ lending activities and other operations. SVB’s greater percentage (94%) indicates that the bank depends more on customer deposits to finance its operations, which can indicate stability and reduced financing expenses in comparison to other funding sources like borrowings but an exceptionally high ratio is crucial to monitor to meet the bank’s liquidity requirement and capacity to fulfil depositor withdrawals and other responsibilities. The Common Equity Tier 1 (CET1) capital ratio is a regulatory criterion established by banking authorities such as the Basel Committee on Banking Supervision. The metric assesses the ratio of a bank’s most reliable capital, specifically common equity, compared to its risk-weighted assets. A larger ratio signifies an increased capacity to absorb losses and endure unfavourable economic situations, hence improving the bank’s financial stability. SVB had a CET 1 capital ratio of 12%, which was 200 basis points more than the norm for leveraged buyouts (10%).
It is noteworthy to mention that SVB had a liquidity coverage ratio (LCR) of 75% at the end of 2022. The LCR rule mandates banks to hold sufficient high-quality liquid assets (HQLA) to manage expected net cash outflows over a 30-day stress scenario, requiring a minimum LCR ratio of 100% for banks with $250 billion in assets or $10 billion in foreign exposures (Feldberg, 2023). It implies that SVBs LCR ratio was below the threshold, however, SVB was exempt from liquidity regulations indicating that the 2019 tailoring rule contributed to its run and failure.
The market capitalization of SVB surged to $39.84 billion in 2021, nearly doubling from $20.08 billion in 2020, due to a significant influx of deposits from tech companies amid the COVID-19 pandemic. However, it dramatically declined to $13.60 billion by the end of 2022, marking a 65.86% decrease, post-collapse. Concurrently, the price-to-earnings (PE) ratio fell from 22.49% in 2021 to 9.01% in 2022. In a similar vein, the return on assets (ROA), return on investment (ROI), and return on equity (ROE) decreased from 1.00%, 1.60% and 13.60% in 2021 to 0.70%, 1.10% and 9.50% in 2022, respectively (Stock Analysis, 2023).
The Fall of Silicon Valley Bank
SVB, a prominent regional lender with $211 billion in assets, catered to finance the niche technology and life science industry. However, the bank’s abrupt collapse was the most significant since the 2008 financial crisis. This ominous occurrence was quickly followed by the failure of Signature Bank, indicating that the banking crisis had begun to spread (Silvergate Capital Corporation, 2023). In response to this escalating crisis, the US government promptly implemented extraordinary measures to stabilize the financial system (D’Orazio, 2023). Nonetheless, the uncertainty surrounding the ultimate resolution of the crisis caused a significant decline in bank equities at the start of the week.
Figure 4 illustrates a timeline sequence of events, beginning with the failure of SVB, the subsequent spread of concerns throughout the financial system, and the concerted efforts to contain the economic consequences.
Chronology of Silicon Valley Collapse.
As illustrated in Figure 2, SVB had very strong financials, yet within 2 days the Bank had collapsed due to a combination of factors, including a steep rise in unrealized loss from investment, a liquidity crisis triggered by a significant withdrawal of deposits by start-up clients, macro-economic changes happening in the external environment, Dodd-Frank Act Amendment 2018 and the inefficiency of Top management decision making. Figure 3 illustrates the chronology of events that led to the collapse of SVB. The tipping point came on 8 March 2023, when SVB announced a 1.8 million loss from investment, the panic started spreading in the market, resulting in a downgrading of ratings and a fall in share price of SVB. What followed was a textbook example of a modern-day bank run. Within 48 hours, $42 billion in deposits vanished. Soon the FED took over the charges and to safeguard depositors’ interest formatted a Bridge bank.
SVB encountered a significant increase in the outflow of deposits as clients rapidly emptied their cash reserves. The company’s extensive securities portfolio prompted concerns, resulting in a restructuring of its balance sheet and a planned share offering. The disclosures were perceived by uninsured depositors as an indication of financial trouble, resulting in a significant withdrawal of deposits amounting to more than $40 billion (Kinder et al., 2023). This run was driven by the influence of social media and a focused network of venture capital investors and technology businesses retracting their investments. The sudden collapse of SVB can be linked to its heavy reliance on uninsured deposits from the cyclical technology and venture capital industry, as well as the failure of its board and management to effectively handle liquidity and interest-rate risk. The company’s financial obligations demonstrated greater volatility than expected, and the withdrawal of deposits from technology and venture capital-backed enterprises facing cash shortages intensified. Below is a comprehensive analysis of the connection between potential factors and the collapse of the SVB.
Global Economic Turmoil and SVB
The global financial system greatly influenced the conditions that led to both the rapid expansion and ultimate downfall of SVB. From 2020 to early 2022, there was a notable occurrence of historically low interest rates (Figure 5). This was a deliberate action taken by central banks globally in response to the economic consequences of the COVID-19 epidemic. SVB was able to take advantage of the low-interest environment to borrow cash at little rates and quickly grow its asset base. Concurrently, the technology industry, which is the main group of clients for SVB, underwent a significant growth phase, resulting in a sudden increase in the amount of money being deposited. SVB’s aggregate deposits surged from $61.76 billion in 2019 to an astounding $189.20 billion by 2021. Due to the increase in deposits, SVB made significant investments in long-term assets, specifically mortgage-backed securities (MBS), which provided greater returns compared to short-term investments. Nevertheless, this approach that first propelled SVB’s expansion proved to be its downfall when the economic situation changed. The conflict between Russia and Ukraine in 2022 had a significant impact on worldwide prices, resulting in the United States seeing its highest inflation rate in 40 years, hitting 9.1% in June 2022 (Figure 6). In order to address inflation, the Federal Reserve took decisive action by significantly increasing interest rates, gradually boosting them from a level close to zero to 4.25% by the conclusion of 2022 (Durko, 2023). The economic changes had significant repercussions for SVB. The swift increase in interest rates resulted in a substantial decline in the market value of SVB’s long-term securities portfolio. With the increase in interest rates, start-ups started depleting their financial reserves at a faster rate, resulting in more withdrawals from SVB. SVB experienced an asset–liability mismatch due to its long-term, low-yield investments being unable to meet the higher interest rates required to retain deposits. This resulted in a growing disparity between SVB’s assets and liabilities.
Money Deployment Strategy and Asset–Liability mismatch
SVB’s aggressive growth strategy focused on enticing deposits by offering higher interest rates, a strategic manoeuvre aimed at enticing consumers to switch from competing banks. The effectiveness of this method was originally demonstrated by the significant growth in SVB’s total deposits, which rose from $61.76 billion in 2019 to an astonishing $189.20 billion by 2021 (Figure 7).
Table 1 illustrates a portion of SVB’s balance sheet, and provides an insight into SVB’s approach for allocating funds. The SVB’s overall investment experienced a six-fold increase compared to the base year 2018, mostly due to a significant rise in total deposits. The amount increased by almost four times, going from $49.3 billion in 2018 to $149.3 billion in 2022. Although there was a substantial increase in deposits between 2020 and 2022, the bank failed to effectively utilize these funds for lending, resulting in a decrease in the loan-to-deposit ratio. In 2021, the ratio reached 35%, signifying a significant disparity of 65% between loans disbursed and deposits collected (The Valuation School, 2023). The bank utilized these deposits to acquire mortgage-backed securities, and although there was a consistent decrease in bond prices as a result of interest rate increases, this was not promptly evident in SVB’s financial statement.
Balance Sheet of SVB from the Year 2019–2022.
Nevertheless, this approach that propelled SVB’s swift growth would eventually prove to be its fatal flaw. In order to counterbalance the elevated interest rates provided on deposits, SVB made substantial investments in long-term treasury bonds and mortgage-backed securities, devoting around $91 billion to these assets. Although these investments offered a consistent and apparently dependable profit, they had a significant drawback—their long-term nature made them extremely responsive to changes in interest rates. With the increase in interest rates, SVB found itself in a delicate and uncertain situation. The long-term securities portfolio of the bank experienced a substantial decrease in its market value, resulting in an increasing difference between the bank’s assets and liabilities. Concurrently, the technology industry, which is the main customer base of SVB, started to encounter a deceleration, resulting in a rise in the number of withdrawals made by start-up clients.
Assets and Investment of SVB from the Year 2019–2022.
The confluence of these circumstances revealed the inherent vulnerabilities in SVB’s method for deploying funds. The bank’s liquidity was compromised due to the illiquidity of its long-term securities, resulting in difficulties in meeting withdrawal requests (Vandanapu, 2024). The previous approach to outperform other banks has evolved into a significant weakness, leading to a liquidity crisis. The asset–liability mismatch became evident when SVB had to sell its available-for-sale (AFS) securities at a loss in order to fulfil withdrawal requests, which led to a bank run. This sequence of events clearly demonstrates how SVB’s assertive acquisition of deposits and investing techniques, once seen as a competitive edge, ultimately led to its downfall.
Weaknesses in Corporate Governance and Risk Management
SVB’s rapid growth and subsequent collapse raise questions about potential weaknesses in its corporate governance and risk management practices. While a comprehensive evaluation would require access to internal data not publicly available, several areas of concern emerge from the bank’s experience (Valterio, 2023). SVB’s board of directors faced challenges in overseeing the bank’s rapidly expanding operations. The bank’s swift growth from 2020 to early 2022, driven largely by favourable market conditions, may have outpaced the development of robust risk management processes and controls. This mismatch potentially contributed to the bank’s vulnerability when market conditions changed.
The effectiveness of SVB’s risk management framework, particularly in relation to its size and complexity, warrants further investigation. The bank’s heavy concentration in the tech sector and its significant asset–liability mismatch suggest potential gaps in risk assessment and mitigation strategies. However, a definitive evaluation of these practices would require more detailed internal information. This discrepancy suggests that governance practices that seemed adequate during favourable market conditions may have been insufficient to navigate more challenging environments (Corbet and Larkin, 2023).
In conclusion, while definitive statements about SVB’s corporate governance and risk management weaknesses cannot be made without more comprehensive internal data, the bank’s experience highlights the critical importance of maintaining strong oversight and risk management practices, especially during periods of rapid growth. The case of SVB serves as a reminder for financial institutions to continually evaluate and strengthen their governance structures to ensure they remain effective across varying market conditions.
The Way Forward
The case of SVB downfall is not just one of failure but of critical lessons. It vividly demonstrates the precarious balance between rapid growth and evolving market conditions. This event highlighted the intricate interplay of various stakeholders, including SVB’s management, depositors, regulators, investors, employees, and the broader tech industry. Each group played a role in the lead-up to the collapse and was impacted differently by its consequences. In retrospect, several alternatives could have potentially mitigated or prevented SVB’s downfall, such as diversifying the client base, implementing more conservative investment strategies, seeking additional capital earlier, improving liquidity management, and enhancing risk assessment practices. These alternatives underscore key lessons for the banking industry, regulators, and the tech sector, emphasizing the importance of robust risk management, diversification, and maintaining flexibility in rapidly changing economic environments.
The collapse of SVB raises several critical questions for the management, regulators and policymakers. Could stronger diversification strategies or better interest rate hedging have prevented this collapse? Was regulatory rollback under the Dodd-Frank amendments partly to blame? For business students and financial professionals, SVB’s demise offers a cautionary tale of how rapid growth, poor risk management, and changing market conditions can create the perfect storm.
Notwithstanding, the downfall of SVB created a time sensitive dilemma to the management, that is, how to address the escalating liquidity crisis without triggering further panic. The management is embogged in dichotomous conundrum. On one hand, selling long-term securities to meet depositor withdrawals risked locking in losses and will erode the financial health of SVB. On the other hand, holding these securities while waiting for market conditions to stabilize risked exacerbating depositor panic and triggering a full-blown bank run. Management had to choose between reputational harm or financial collapse.
Looking beyond the immediate crisis, this case underscores the urgent need for strategic shifts to strengthen financial institutions. To put it into action, financial institutions must prioritize diversification in their client base and asset portfolios to reduce overexposure to specific sectors. As the bank expanded in size and complexity, supervisors failed to identify its vulnerabilities promptly. It is crucial to continuously monitor financial well-being. The implementation of dynamic risk assessment tools like stress testing and scenario analysis to adapt to economic fluctuations assumes significance (Aharon et al., 2023; Alam & Akhtar, 2024). This case has propelled the need for a robust governance framework, faster intervention measures, and improved supervisory control by the regulators (Akhtar et al., 2021; Jafar et al., 2024).
For startups and venture-backed firms, the crisis highlights the importance of diversifying banking relationships and building financial safeguards. By fostering collaboration among all stakeholders and embedding these lessons into actionable strategies, the financial ecosystem can become more robust, prepared to weather future disruptions with greater stability.
By embedding these lessons into actionable frameworks, stakeholders can mitigate the risks of similar crises, ensuring resilience in the face of inevitable uncertainties. The SVB case demonstrates that even seemingly successful institutions can be vulnerable to swift failures when faced with a perfect storm of market conditions, strategic decisions, and stakeholder actions.
Discussion Questions
Q1.What distinct factors facilitated SVB’s emergence as one of the largest banks in Silicon Valley?
Q2.Elucidate the significant occurrences and determinants that contributed to SVB’s remarkable expansion of assets from 2018 to 2021.
Q3.Examine the yield dynamics of mortgage-backed securities in the context of interest rate fluctuations. How are the yields on MBS affected by changes in interest rates, and what implications does this have for financial institutions with significant holdings in MBS?
Q4.Examine SVB’s fund deployment strategy and its influence on the bank’s overall financial standing. Elaborate on the challenges that arise due to SVB’s asset–liability mismatch, particularly in the context of withdrawing start-up funding.
Q5.Analyse the response of the market to SVB’s collapse and the subsequent dissemination of concerns across the financial sector.
Footnotes
Acknowledgments
The authors would like to thank Christ University and University of Technology and Applied Science (UTAS), Ibra for facilitating the support to conduct this research.
Availability of Data and Material
The datasets used and/or analysed during the current study are available from the corresponding author on reasonable request.
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Declaration of Generative AI in Scientific Writing
During the preparation of this work the authors did not used any AI tools.
Funding
The authors received no financial support for the research, authorship and/or publication of this article.
