In a shocking turn of events on March 11, 2023, Silicon Valley Bank (SVB), a prominent player in the American banking sector with assets exceeding $200 billion, declared bankruptcy without any prior warningThis dramatic downfall marked one of the most significant collapses in the banking industry since the global financial crisis of 2008, and what was even more astonishing was the incredibly fast chain of events that led to its demise — all within a mere 48 hours.

The ramifications of SVB’s failure rippled swiftly through financial markets, impacting not just the American stock market and banking sectors, but also reverberating across Europe, Asia, and even the cryptocurrency realmSo, what exactly transpired? Why did this bank fall so abruptly? And what implications does it hold for the average person? Let’s delve into the circumstances surrounding this unprecedented event.

To understand the gravity of the situation, we need to rewind to early 2020 when the COVID-19 pandemic hit the world like a fierce storm, plunging the global economy into a deep downturn

In response to this crisis, on March 3, the Federal Reserve took decisive action to bolster the sluggish economy by cutting interest rates by 0.5%.

Just 12 days later, on March 15, the Federal Reserve made an extraordinary move by slashing rates to a historic low of 0-0.25%, employing the drastic measure of near-zero interest rates to pump life back into the faltering economyIn the backdrop of such aggressive monetary policy, Silicon Valley Bank found itself on an advantageous trajectory, collecting an immense influx of nearly zero-cost depositsBetween June 2020 and December 2021, its deposits surged rapidly from $76 billion to over $190 billion.

For depositors, this influx represented the accumulation of wealthHowever, for the bank, these deposits became liabilities, albeit low-cost ones that accrued little to no interestWith such a vast pool of inexpensive funds, SVB was compelled to explore investment opportunities

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One might think that, given its "Silicon Valley" moniker, the bank would channel its resources into local startupsWhile it did invest in the burgeoning tech sector, the demand for loans from startups did not keep pace with their funding needsInstead of increasing, the demand for loans began to dwindle.

Consequently, SVB shifted its focus towards investing in low-risk, short- to medium-term government bondsOn the surface, these bonds appeared secure, but they typically offered annual yields of only around 1%. While this seemed advantageous given their low funding costs, the bonds carried inherent risks that would later become apparent.

A critical aspect to note is that many of these bonds were intended to be held to maturityThis meant that the bank would only recoup its principal and interest when the bonds maturedIf SVB needed to access cash before then, the bank would face both interest losses and a potential reduction in principal, creating a precarious situation termed “mismatched maturities.”

Explaining this further, "short debt, long investment" raises concerns

For example, demand deposits — short-term liabilities — can be withdrawn at any moment, while the five-year bonds represent longer-term investments, locking the funds away for an extended periodIn theory, every depositor could withdraw their funds simultaneously, while the bank's loan portfolio could take years to pay back.

How, then, does a bank manage this mismatch in timeframes? Enter the deposit reserve requirement systemHave you ever wondered how much cash a bank must set aside to respond adequately to potential withdrawal demands from its customers? The probability of all depositors withdrawing their funds at the same time is remarkably lowUsually, maintaining a certain percentage of cash on hand is sufficient to address most withdrawal requests, which is why central banks worldwide implement deposit reserve requirements.

However, an important consideration arises: what happens to our money should a bank fail? After all, banks are not impervious to closure

Many individuals adopt a strategy of “diversifying risks” by spreading their deposits across multiple banks, ensuring that each account remains within the $250,000 insurance payout limitWhile this approach may provide peace of mind for personal savers, it fails to accommodate large corporate deposits.

With much of SVB's deposits exceeding the $250,000 insured limit—reportedly 90% of the bank's deposit structure—any potential failure could leave small businesses and startups perilously exposed, leading to a catastrophic loss of fundsHowever, the unexpected happened; as interest rates steadily rose starting in 2022, by February 2023, the Federal Reserve hiked rates to between 4.5% and 4.75%.

This created a dire scenario for Silicon Valley BankHolding government bonds that yielded just 1%, the bank's funding costs skyrocketed above 4%. The result was a balance sheet showing losses that had not yet been realized—what financial experts refer to as “unrealized losses.”

During this same period, the technology sector entered a downturn

Giants like Tesla, Facebook, Microsoft, and Twitter resorted to significant layoffs, with American and Chinese tech companies slashing budgets and freezing hiringVenture capital firms, including Sequoia, grew increasingly cautious of the economic climate, urging their invested companies to tighten their belts.

The primary depositors at SVB comprised a concentrated group of tech firms, facing sustained pressure to withdraw funds to navigate the challenging environmentThis led to a rapid cash outflow from the bank, triggering severe liquidity issues.

In a desperate attempt to close the funding gap and recoup cash, the bank made the fateful decision to sell off its assetsMuch of its asset base consisted of held-to-maturity bonds, meaning that selling them prematurely would result in substantial lossesWhen SVB sold $21 billion in securities, it suffered an immediate loss of $1.8 billion

This announcement sent shockwaves throughout the market and fueled panic among depositors.

On March 8, requests for withdrawals and fund transfers surged explosively, exceeding $42 billion in volumeStartups and funds reacted rapidly, initiating mass withdrawals amidst rising fearsThe bank, only capable of accessing about $10 billion in funds, stood helpless to counter this tidal wave of withdrawals, inevitably leading to its bankruptcy declaration.

The turmoil deeply affected the startup ecosystem, as highlighted by Y Combinator’s CEO, who unequivocally described the fallout as catastrophic for early-stage enterprisesWith a substantial amount of funding locked in SVB, the potential losses could spell disaster for numerous startups, leading to their exit from the market altogether.

In the aftermath, 125 venture capital firms, including Sequoia, rapidly banded together to appeal to the government for intervention, expressing willingness to cooperate with any entities looking to acquire the disbanded bank