Failure of Silicon Valley Bank (2023)
A California bank closed on March 10, 2023 after a depositor run, triggered by the disclosure of losses on a long bond portfolio bought when rates were at their lowest.
Silicon Valley Bank took in a surge of deposits from technology companies in 2020 and 2021, which it invested in Treasuries and agency mortgage-backed securities, of very high quality but long maturity. A large share was classified as held to maturity, a category carried at amortized cost: the 2022 rise in rates eroded their market value without the loss showing on the balance sheet or in the ratios. The risk was not credit but duration, and it became real only if the bank had to sell before maturity, meaning if deposits left. Those deposits, highly concentrated and mostly above the insurance limit, could leave within hours. The lesson carries over to life insurers: an invisible unrealized loss is painless as long as the liabilities stay put, and becomes a certain loss once a mass surrender forces a sale.
At December 31, 2022, SVB's held-to-maturity portfolio stood at 91.3 billion dollars at amortized cost, with 15.2 billion in unrealized losses. On March 8, 2023, the bank announced the sale of about 21 billion dollars of securities at a 1.8 billion loss; on March 9, withdrawal requests reached 42 billion, and on March 10 the California regulator closed it and appointed the FDIC as receiver.
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