The collapse of Silicon Valley Bank (SVB) in March 2023 marked one of the largest bank failures in U.S. history and sent shockwaves through the tech and financial sectors. SVB, which had been a cornerstone of startup and venture capital funding for nearly 40 years, abruptly failed, leaving many businesses scrambling to secure their funds. This collapse was driven by a combination of factors, including a flawed business model, mismanagement of risk, and macroeconomic pressures that highlighted vulnerabilities in the banking industry.
The Rise of Silicon Valley Bank
Founded in 1983, Silicon Valley Bank quickly became synonymous with innovation and growth in the tech industry. The bank specialized in providing financial services to startups, venture capital firms, and the tech ecosystem. By understanding the unique needs of high-risk, high-reward tech startups, SVB became a trusted financial partner for many fledgling companies. At its peak, SVB held billions of dollars in assets, primarily from tech companies, and served as a key player in the growth of Silicon Valley.
However, SVB’s business model, which was heavily concentrated in one sector—technology—also made it vulnerable. A significant portion of its deposits came from tech firms, many of which were early-stage companies that could face liquidity challenges in times of economic downturn. The bank’s success was tied closely to the fortunes of the tech industry, and when that sector began to struggle, so did SVB.
The Role of Interest Rates and Mismanagement at Silicon Valley Bank
One of the critical factors that led to SVB’s collapse was its exposure to rising interest rates. Like many banks, SVB invested heavily in long-term government bonds, which are typically considered a safe investment. However, when interest rates began to rise in response to inflationary pressures in 2022 and 2023, the value of those bonds fell.
SVB had invested a significant portion of its deposits into these low-yielding bonds without adequately hedging against the risk of rising interest rates. As a result, when the Federal Reserve aggressively hiked rates to combat inflation, the value of SVB’s bond portfolio plummeted, leaving the bank with significant unrealized losses.
Compounding this problem was the fact that SVB’s customer base—primarily tech companies—began withdrawing their deposits to address their own cash flow issues as venture capital funding dried up. This led to a classic bank run, where a large number of customers withdrew funds simultaneously, forcing SVB to sell its devalued bond holdings at a loss to cover the withdrawals.
The Collapse and Aftermath of Silicon Valley Bank
On March 10, 2023, SVB was placed into receivership by the Federal Deposit Insurance Corporation (FDIC), marking the second-largest bank failure in U.S. history after Washington Mutual’s collapse in 2008. The bank’s collapse sent shockwaves throughout the tech industry, as many startups relied on SVB for their day-to-day banking needs. Several companies faced potential payroll disruptions, and the FDIC moved quickly to assure customers that their insured deposits would be protected.
In response to the collapse, regulators and policymakers took swift action to stabilize the financial system. The Federal Reserve announced a new emergency lending facility to help banks facing similar issues, and the Treasury Department assured that the broader banking system remained strong.
Lessons from SVB’s Collapse 
The collapse of Silicon Valley Bank highlights several critical lessons for both financial institutions and regulators. First, it underscores the importance of diversification in banking. SVB’s heavy concentration in the tech sector made it highly vulnerable to the downturn in that industry. Banks with more diversified customer bases and investment portfolios are generally better equipped to withstand economic fluctuations.
Second, the collapse emphasizes the importance of managing interest rate risk. SVB’s failure to hedge against rising rates contributed significantly to its downfall. Proper risk management and the use of financial instruments to offset interest rate exposure could have mitigated the impact of the Federal Reserve’s actions on SVB’s bond portfolio.
Finally, the failure of SVB serves as a reminder of the potential for systemic risk in the banking system. While SVB was a relatively niche player, its collapse had broader implications for the tech industry and the financial system. This has led to renewed discussions about the need for stronger regulation, especially for mid-sized banks that, like SVB, are critical to specific sectors of the economy.
The collapse of Silicon Valley Bank was a wake-up call for the banking industry and regulators alike. It revealed vulnerabilities in SVB’s business model, mismanagement of interest rate risk, and the broader impact of macroeconomic pressures. As the industry reflects on the lessons from this failure, the need for prudent risk management and regulatory oversight has become more apparent than ever.
If you have Silicon Valley Bank related losses contact Bakhtiari & Harrison to evaluate your FINRA claim.