Silicon Valley Bank: How A Bank Fails

Silicon Valley Bank was shut down by regulators on Friday, March 10, in the largest bank failure since 2008. The bank had $209 billion in assets at the end of 2022. Bank failures can come from various causes: fraud, bad lending or a mis-match of assets and liabilities. It appears that asset-liability mismatch was behind the bank’s problems.

A bank takes in deposits from customers, who could be individuals or businesses. Then it invests most of those deposits in loans or securities, but keeps some cash on reserve for when a depositor wants money back. Silicon Valley Bank was not your typical bank, which by itself is not a criticism. Most of their deposits came from large companies that were part of the tech sector. For example, a start-up receives $100 million from a venture capital fund. It parks that money at its local bank. Another company might have a treasurer who gets the best possible short-term interest rate by investing in commercial paper and other financial instruments. But the start-up’s chief financial officer is not hired to nurse an extra five basis points from the cash holding; the CFO has bigger issues to deal with and few staff members to help. So the CFO uses the bank.