FIGURE 2 : Panic of 1819 Timeline of Key Events
uncertainty . By April 2022 , commercial bank deposits peaked at $ 18.2 trillion , an increase of 36 % in only two years .
Commercial banks invested this windfall by issuing loans and purchasing investment securities . SVB was especially flush with cash because the bank not only received large inflows from stimulusrelated deposits , but it also received huge inflows from technology firms . During the darkest months of the pandemic , technology innovation seemed to be one of the only promising investments . Digital health companies promised to re-engineer healthcare ; social media companies promised to rescue people from loneliness ; and remote working technologies promised to keep the gears of industry in motion . Venture capital firms responded by investing aggressively in a wide variety of technology startups , and a large percentage of the new cash injections were deposited in the vaults of SVB .
Silicon Valley Bank Goes Long
Founded in 1983 , SVB had long served as the commercial bank of choice for Silicon Valley-based technology companies . It was unsurprising , therefore , that the flood of investment into tech companies was deposited with SVB . At the end of 2019 , deposits stood at $ 61.8 billion , but only three years later , deposits ballooned to $ 173.1 billion .
All commercial banks struggled to invest new deposits , but SVB ’ s challenge was particularly extreme . To win the deposit business in the first place , SVB enticed customers with aggressive terms and lower interest rates on various loan products . These terms were helpful in attracting customers initially , but they had limited power to keep customers with the bank should better rates become available elsewhere . Even more importantly , SVB invested a significant amount of the deposit windfall in long-term , fixed-rate US Treasury securities . These investments had little credit risk , but they had significant interest rate risk in a rising rate environment .
It is common practice in such situations to use interest rate hedges to reduce risk . Instead , SVB left these positions unhedged , mistakenly assuming that their deposits were safe from mass withdrawal . As the value of their loan and Treasury investment portfolio decreased as interest rates increased , SVB ’ s balance sheet deteriorated , and the bank was unable to offer competitive rates . Depositors could plainly see better investment returns elsewhere , and they began withdrawing funds .
Silicon Valley Bank Goes Under
On March 9 , 2023 , several venture capital ( VC ) firms emailed and texted management of their portfolio companies and advised them to withdraw funds from SVB . VCs were concerned that the failure of SVB could result in losses on the portion of deposits that exceeded the $ 250,000 FDIC insurance cap . The moment that these firms hit “ send ,” a catastrophic run on SVB was inevitable because the majority of its depositors had balances exceeding the $ 250,000 FDIC cap . Within 48 hours , SVB customers demanded the withdrawal of more than $ 100 billion , which constituted more than 50 % of SVB ’ s deposit base and was far in excess of its liquid cash reserves . On March 10 , 2023 , the FDIC placed SVB in receivership , and by Sunday , March 12 , the Federal Reserve invoked Section 13 ( 3 ) of the Federal Reserve Act to use its emergency powers to stop the run from spreading .
So , how did this happen ? What mistakes did SVB make that other banks seemingly avoided ? As is almost always the case with the collapse of a major financial institution , there were multiple factors . The following three were especially important in the failure of SVB .
1 . Poor Economic Situational Awareness : SVB management failed to appreciate that economic conditions in 2022 were fundamentally different than the ones that had persisted over the prior 40 years . Instead , conditions resembled those present in 1919 and 1920 . The
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