In recent years, banks — newly flush with extra deposits from pandemic-era savings and stimulus — bulked up on bonds and other fixed-rate investments like mortgage-backed securities. At SVB, fixed-rate securities made up nearly 60 percent of the bank’s assets at the end of 2022.
But as the Fed raised interest rates, those bonds became less valuable. SVB’s $91 billion portfolio of long-term securities was worth just $76 billion at the end of 2022. That $15 billion gap was far wider than the $1 billion shortfall the company reported a year earlier.
In addition, the vast majority of the bank’s deposits — nearly 94 percent — were uninsured, according to data from S&P Global. The national average is about half, which left SVB especially vulnerable to fears of a run that became self-fulfilling. The bank’s customers withdrew $42 billion in just 24 hours, leaving the bank with a negative balance of $1 billion.
“It’s simple: When interest rates go up, the value of bonds go down,” said Darrell Duffie, a management and finance professor at Stanford University. “Silicon Valley Bank had a whole lot of bonds — both treasury securities and mortgage bonds — so when the Fed raised interest rates to try to reduce inflation, the value of all of those bonds went down.”
That wouldn’t have been a big deal if SVB had been able to hold onto its bonds until they matured. But with a rush of depositors clamoring to take their money from the bank, SVB had no choice but to sell its securities at a massive loss. The bank quickly collapsed.
“It was a classic bank run,” Duffie said.
And it helped set off similar runs elsewhere. First Republic also had a lot of long-term investments in securities as well as home mortgages, which lost value in the interest rate run up. First Republic lost $100 billion in deposits following SVB’s downfall, which eventually led to its own demise.