6 Reasons Silicon Valley Bank Failed and What Business Leaders Should Do About It

A customer reads a notice about Silicon Valley Bank's closure at its headquarters in Santa Clara, California.
A customer reads a notice about Silicon Valley Bank's closure at its headquarters in Santa Clara, California. Photo: Getty Images.

Your CFO should assess whether your bank is likely to go under due to a bank run and/or bad loans.

With all the challenges they must overcome to keep their businesses running, CEOs should not have to think about their banks going bankrupt. Sadly, no one is immune from the risks in the banking system.

With the March 10 FDIC takeover of Silicon Valley Bank, the second largest bank failure in history as measured by its $209 billion in assets, business leaders must now take a closer look at where they bank.

For business leaders whose banks currently appear to be functioning as expected, there are important things you must do to make sure you do not suffer the same fate.

Before getting into that, I think it is important to know why SVB collapsed in about 48 hours.

Why Did SVB Fail?

Here is how I applied Toyota’s “Five Why” approach to dive more deeply into why SVB collapsed:

  1. Why did the FDIC take over SVB? SVB could not find a private institution willing to acquire the bank in time.
  2. Why was SVB unable to find a buyer? CNBC wrote, “a rapid outflow of deposits — totaling $42 billion on March 9 alone –about a quarter of the bank’s total deposits, according to the Wall Street Journal — was complicating the sale process.”
  3. What prompted the rapid outflow of deposits from SVB? SVB surprised investors on March 8 with an announcement that it took a $1.8 billion loss on its $21 billion portfolio of treasury securities and borrowed $15 billion. Since 94 percent of SVB’s deposits exceeded $250,000, the FDIC did not insure them — thereby boosting incentives for depositors to flee, noted AP.
  4. What prompted SVB to raise capital at such a high cost? In February 2023, Moody’s told SVB that it was preparing a downgrade of its credit rating.
  5. Why was Moody’s poised to downgrade SVB’s rating? SVB’s deposits and the value of its bond portfolio had fallen sharply.
  6. Why had SVB’s deposits and the value of its bond portfolio dropped? As the Fed raised interest rates, technology stocks lost value, the IPO market dried up, venture capital firms stopped providing startups with more capital to fund their losses, startups began withdrawing their deposits to fund operations, and the higher interest rates cut into the value of SVB’s lower yielding securities.

In the wake of SVB’s failure, business leaders should evaluate whether their bank is likely to go under. To do that, ask your CFO to assess the risk of two kinds of bank failures: an SVB style run on the bank or a Lehman Brothers-like write-off of bad loans.

1. Check your bank’s level of uninsured deposits.

The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000. If your bank has high levels of deposits greater than that amount it is at risk of sudden panicked deposit withdrawals.

SVB and Signature Bank – both of which the FDIC took over in recent days – had very high levels of uninsured deposits. As AP reported above, 94 percent of SVB’s deposits were above the FDIC insurance cap.

A related statistic to consider is whether your bank pays a higher than average interest rate on deposits. As the Wall Street Journal reported, Bank of America paid an average rate of 0.96 percent on deposits in the fourth quarter, compared with 1.17 percent for the industry.

SVB paid 2.33 percent. This higher than average rate hinted that SVB was too dependent on deposits.

If your bank has these characteristics, move your money out before the crowd.

2. Evaluate the risk in your bank’s investment and loan portfolios.

Banks take deposits and lend them out or use them to buy securities. Both of these uses of your deposits are risky. Bankers are supposed to manage those risks to earn high net interest margins – the difference between the interest the bank charges on loans and the interest it pays to depositors.

SVB’s risk was in its $21 billion portfolio of government securities. The bank purchased the securities when the interest rate was below 2 percent. SVB failed to hedge against rising rates – hence it valued those securities at 17 percent below their purchase price. Since that drop in valuation was nearly equal to its equity, SVB was clearly in trouble.

While not as big a concern at SVB, your CFO should also compare trends in the quality of your bank’s loan portfolio – such as payment delinquencies, bad loan charge-offs and loan loss reserves — to those of the rest of the industry.

If your bank has rising investment or loan risks, take your business to a safer institution.