One year after “all hell broke loose” at Silicon Valley Bank

This week marks the first anniversary of the collapse of Silicon Valley Bank, the largest bank failure in the United States since the 2008 financial crisis.

SVB wasn’t just Silicon Valley Bank, it was actually where Silicon Valley banked.

Today, we’re revisiting the SVB collapse with Anat Admati, a finance and economics professor at Stanford University and co-author of the book “The Bankers’ New Clothes.”

She told Marketplace’s Lily Jamali that the moment that marked the beginning of the end for SVB was when the bank announced it needed to raise $2 billion in equity — otherwise known as stock — to improve its financial position days before.

The following is an edited transcript of their conversation.

Anat Admati: By the time Silicon Valley Bank couldn’t raise equity, there was no doubt at all that the bank is what’s called insolvent, or a zombie, or living dead. It hasn’t defaulted yet on anybody, but it’s unable to pay its debt, including deposits. The depositors — the clever people from Silicon Valley — figured out this bank is bust, and their deposits are above the deposit insurance limit, and they wanted their money out. All of a sudden, because nowadays we have media and mobile apps, there was a $42 billion run on the bank on Thursday, March 9, 2023. At that point, it was clear that the bank was insolvent, everybody wanted their money out. And the FDIC [Federal Deposit Insurance Corp.] stepped in and created this other bridge bank, and the FDIC announced on Friday, March 10, that they’re taking over the bank. The announcement at the time said depositors with insured deposits, meaning $250,000 per depositor, will have immediate access to their funds on Monday, but uninsured depositors, we will let you know. Now all hell broke loose at that time. All of a sudden, it was like, “Oh, well, you’ve got to give me back my money.”

Lily Jamali: What do you make of how regulators handled the aftermath of the Silicon Valley Valley collapse? It wasn’t just them, of course, and there was real concern that this could trigger a much bigger financial collapse, but that didn’t happen.

Admati: On March 12, 2023, we had an announcement that came in the afternoon from the Federal Reserve, the Treasury Department and the FDIC. And the announcement had multiple parts to it. One part was, “OK, you didn’t sleep last night. Go to sleep this night, because everybody will get access to their money right away. The FDIC will insure everybody, and then it’ll figure out how to collect that money from other banks.” The Federal Reserve announced that it was going to start extra and additional new lending programs for a year, which are just also about to end supposedly, that would make loans to all the banks with the unusual feature that the Federal Reserve, as a lender of last resort, becomes actually a very friendly lender that overvalues the assets of the banks, because it takes as collateral the assets at their original value, not at their reduced value. In other words, if you have a Treasury security that’s now worth a lot less than you paid for it, we’re going to lend you basically up to what it was worth when you bought it.

Jamali: Can you talk a little bit about the role that SVB played in the startup ecosystem in Silicon Valley and elsewhere? Was there something about that role that made it particularly susceptible to this kind of financial trouble?

Admati: Silicon Valley Bank started here and wanted to be part of Silicon Valley, that’s why it took this name. And it immersed itself in this community of innovation and wanted to be their bank. It always supposedly threw a lot of parties, and their executives wanted to be part of this milieu even though banking is not usually the way innovators fund themselves. But here’s this bank that understands their needs, and they’re going to hang together and innovate together.

During COVID-19, there was just a flood of deposits, because there were zero-interest rates, and there was a lot of money sloshing around. And so the amount of deposits really, really grew. The amounts were really astronomical. So then the deposit base was very small relative to other banks, even of its size, but many of them had really huge deposits. Apparently, the average deposit size was $4 million. Here, they were reckless, because maybe it’s in the culture, you know, to be taking risks. And banks are usually not supposed to be, you know, casinos, but certainly in the environment here, the bank did not show prudence, that’s for sure.

Jamali: Can you give listeners a sense of what the lesson is to be learned as we look back a year later on everything that happened here?

Admati: The lesson is that the banking system remains incredibly fragile, and the lesson is that they [banking regulators] keep hiding it from all of us. So this is not over. They just kicked the can down the road, and they did not really address the weakness of many banks still, they just kept lending to them. And this is still a potential problem coming up. So, it’s not like it’s over. I don’t think we should feel that it’s really over just because people don’t talk about it. They don’t talk about it until they suddenly do talk about it.

More on this

It is kind of remarkable how big of a story this was around this time last year. And then it just went away. We expect many retrospectives to circulate on this first anniversary.

Last year, I reported an explainer on the specific kind of risk that got SVB into trouble. It’s known as “duration risk” and it became a big problem when the Federal Reserve started hiking rates at the fastest pace in modern history.

The fallout from the collapse of Silicon Valley Bank is far from resolved a year later. It was acquired by First Citizens, which said in a lawsuit that executives at HSBC Holdings, a multinational bank, greenlit a plan to steal employees and confidential information from SVB when it failed. First Citizens alleges those resources went into creating a competing venture capital business now housed at HSBC — an assertion HSBC denies.