The External and Internal Causes of SVB’s Collapse and the Role of Regulators

Megan Aldworth

Associate Editor

Loyola University Chicago School of Law, JD 2023


Silicon Valley Bank (SVB) started in Silicon Valley in 1983 and found a booming growth in tandem with the tech industry and venture capital. At its collapse, which spanned over 48 hours and started on the eve of March 8, it was the sixteenth largest bank in the United States with $209 billion in deposits. Days later, the collapse is now being touted as “America’s second-largest bank failure.” In the wake of its demise, reputable publications and well-known industry voices have been quick to allege the sources of this collapse. These sources allegedly range from a lack of risk oversight at SVB, lackluster supervision by management and regulators, and poor remedial efforts in regard to SVB’s portfolio for a volatile and rapidly changing economy.


Earlier signs of demise


While the failure of SVB happened over a matter of hours, new analysis reveals it was likely a long time coming. On May 1, the results of an investigation by the Federal Reserve (Fed) are expected to be released. Until then, speculation swirled around SVB’s recent balance sheets, investment portfolio, use of deposits, lack of compliance risk officer, and the management’s actions leading up to the demise. However, this investigation will likely not reveal the regulators own faults in this collapse.


In 2020, SVB found itself with high liquidity and a desire to turn profits. At this time, it was harnessing low interest rates and watching its own stock prices soar. Along with this, SVB saw an increase in new deposits and in turn invested deposits in long-term U.S. treasury bonds and mortgage-backed securities, traditionally sound investments. What is clear is that SVB did not handle interest rate risks in a well-grounded manner. Last year, the Fed shifted economic policy to curb inflation, namely, it raised interest rates to all-time highs since the 1980s, this in turn led to a stark decline in market value of SVB’s bond holdings that it purchased when interest rates were low. Ultimately, this drove SVB to incur a $1.8 billion loss on sales of its investments to try to meet deposit needs. The company failed to raise this capital and could not meet the whopping $42 billion in withdrawals that occurred leading up to the failure.


The Fed’s investigation will likely reveal exactly how extreme the internal mismanagement was at SVB; according to one senior Federal Reserve official this was a “textbook case of mismanagement.” While a great deal of hearsay surrounds the actions of company management and directors, it is alleged that actions leading up to the collapse may implicate some in management were involved in an insider trading scheme. According to CNBC, over the two years preceding the collapse, executives and directors “cashed out of $84 million worth of stock,” and just days before the collapse, CEO Greg Becker and other executives received annual bonuses.


The role of the Federal Reserve and the Government


In the weeks since SVB’s failure and the Government’s subsequent rescue, it has become clear that an external party may also be to blame for SVB’s failure. At the conclusion of 2022, SVB had $15 billion in loans from the Federal Home Loan Banks system. This is traditionally a last resort for banks and is a government-sponsored lender. According to Columbia law professor of financial regulation Kathryn Judge, this is “the type of flag that says you need to look closely,” and according to financial regulation scholar from University of Pennsylvania Peter Conti Brown, “it’s a failure of supervision… the thing we don’t know is if it was a failure of supervisors.” Further, SVB’s assets had quadrupled in the past five years, it was highly concentrated in a narrow area, and around 94% of its deposits were uninsured because the its borrowers and depositors were far above the $250,000 cash limit that the FDIC guarantees per deposit.


Over a year before this failure, the Federal Reserve Bank of San Francisco had appointed a team of senior examiners to further assess SVB and an array of problems were discovered. This reportedly led to a firing off of formal warnings to SVB in the form of regulatory documents called “Matters Requiring Attention” and “Matters Requiring Immediate Attention,” with the central message being SVB must track and hedge interest rate risks.


Another possible fault of the Fed is the 2018 regulatory rollback that occurred during the Trump administration when the overall sentiment was to scale back on Dodd-Frank requirements that arose out of the 2008 financial crisis. Following 2018, banks that had over fifty billion in assets were no longer required to comply with “enhanced supervision requirements.” These included a mandated annual stress test that would pick up on the concentration of risks, and another requirement for a living will that outlined how the bank would die in the event of a crisis. Since the 2018 rollback, only banks with two hundred and fifty billion in assets must comply with these requirements. With this change, SVB no longer fell within these Dodd-Frank requirements, and some say, had these measures still been in place, regulators may have been able to intervene sooner to prevent failure. Another major concern in the interplay between regulators and SVB was that the CEO of SVB was a Director of SVB’s regulator.


Changes the Fed should consider


Perhaps one of the loudest messages emanating from SVB’s collapse is that the Fed cannot be both a regulator and have an interest in managing the business affairs of the economy. Over the years, the economy has witnessed many “bubbles, manias, and crashes” and while some patterns are cyclical in nature, others are structural. If a regulator sends a message to those it regulates, as the Fed did in warning of interest rate hikes, it should follow up to make sure measures are in place by financial institutions to safeguard, at the very least, the deposits of customers.