The Santa Clara headquarters of SVB .
Minh Nguyen passage of 100 years makes it understandable that SVB executives initially failed to grasp the situation , but their dismissal of the Fed ’ s warnings is less excusable . In early 2022 , the Fed clearly signaled its commitment to a much more aggressive monetary policy , often referencing the tragic errors that led to the Great Inflation of 1965 – 1982 . SVB failed to heed these warnings . Instead , SVB locked in low rates on a significant portion of its loan portfolio by investing in long-term , low-yielding fixedrate Treasury bonds , while removing interest rate hedges designed to protect against rising interest rates .
2 . Inadequate Risk Mismanagement : The lack of appropriate risk management at SVB was probably its most egregious unforced error . SVB did not employ a head of risk management for an entire year prior to its collapse . This is a serious deficiency in any economic environment , but it was especially careless during a period of elevated price instability and interest rate volatility .
3 . Fumbled Handoff of the Regulatory Baton : The Federal Reserve detected several deficiencies in SVB ’ s management practices , but it did not act quickly enough to force mitigation . An important contributing factor stemmed from the transition of oversight when SVB assets crossed the $ 100 billion mark , which is a threshold that triggers the enforcement of new regulatory requirements and transitions oversight to a new team within the Fed . This transition slowed the Fed ’ s response to SVB and contributed to its collapse .
In summary , the failure of SVB was the result of a sharp increase in deposits , poor economic situational awareness , deficient risk management and a fumbled regulatory hand off . When rates increased and the economy faltered , technology companies began to withdraw deposits , leading SVB to experience significant liquidity pressures . The forced sale of depreciated fixed income assets to satisfy withdrawals created a hole in SVB ’ s balance sheet . The death blow came during the week of March 10 , 2023 when a botched effort to raise capital and repair its balance sheet caused depositors to panic . When VC firms encouraged portfolio companies to withdraw their capital , SVB ’ s fate was sealed .
SVB was an extreme manifestation of a broader problem . Commercial banks that fail to properly protect their income statements and balance sheets from rising rates continue struggling to retain depositors . Unable to offer competitive rates on deposits , customers withdraw funds and re-deposit them in higher yielding accounts and money market funds . This explains why similar runs occurred at Signature Bank and First Republic soon after
the run on SVB .
Echoes of the Past
One of the greatest challenges for financial policymakers is proving that their actions were necessary when a crisis is averted . This is why revisiting the lessons of history is so valuable . The experience of 1819 strongly suggests that had the Federal Reserve , FDIC , Treasury and executives of large financial institutions failed to act
16 FINANCIAL HISTORY | Summer 2023 | www . MoAF . org