Silicon Valley Bank, 2023

At a glance

What happened

Silicon Valley Bank's deposits roughly tripled to about $189bn between 2019 and 2021 as its technology clients raised record funding. With little loan demand, it bought long-dated Treasuries and mortgage-backed securities at the low yields of 2020 and 2021. Then the Federal Reserve raised rates at the fastest pace in decades. On 8 March 2023 the bank announced a loss-making securities sale and a capital raise; depositors asked to withdraw $42bn the next day, and regulators closed it on 10 March.

Why it went wrong

Most of the securities were held to maturity, carried at cost, so their falling value did not show in reported capital. By the end of 2022 unrealised losses of about $15bn were close to its $16bn of equity. The bank had removed most of its interest rate hedges during 2022, leaving the duration exposure open. About nine in ten deposits were above the insurance limit, held by a tightly connected client base that moved together once worry spread.

What it teaches

Duration risk is real whether or not the accounting shows it, and a bank whose depositors can leave overnight cannot count on holding bonds to maturity. Removing a hedge as rates rise turns it into a bet on rates falling. Concentrated, uninsured deposits are a liquidity risk in their own right, and the speed of a modern run belongs in the stress test.

Key terms

Held to maturity

An accounting classification that carries bonds at amortised cost, keeping market losses out of reported capital.

Duration

The sensitivity of a bond’s price to a change in yields, roughly the percentage price change per 1% move.

Unrealised loss

The fall in an asset’s market value below its carrying value, not yet crystallised by a sale.

Uninsured deposits

Deposits above the government insurance limit, whose holders have most reason to run.

Interest rate swap hedge

Paying fixed and receiving floating to offset the fall in value of fixed-rate assets as rates rise.

Bank run

Depositors withdrawing at once because they fear the bank cannot pay them all.

Where it sits in the course

Case studies like this one are used throughout risk management teaching, including FRM® preparation, as worked examples of interest rate risk in the banking book and deposit run risk. In OTC Learn the lesson runs in five steps: what happened, the position, why it broke, what it cost and what it teaches, followed by a worked example with the numbers. See the lesson outline.

Related case studies

• The gilt LDI crisis, 2022Pension hedges that worked, and could not be funded

The instruments behind it

OTC Learn lessons on the products this case turns on:

• Interest Rate SwapTrade fixed for floating payments
• DV01 and Rate RiskWhat one basis point is worth