The 2023 SVB Bank Collapse — A Crisis Made by 'Safe' Government Bonds
Why did a bank holding piles of the 'safest' U.S. Treasuries collapse in a matter of days? The answer lies in 'rates' and 'speed.'
What SVB Got Wrong
Silicon Valley Bank (SVB) was a bank that mainly took deposits from startups and venture funds. With deposits that flooded in during the low-rate period of 2021, it bought large amounts of long-maturity bonds (mainly U.S. Treasuries and MBS).
The problem was that it classified these bonds as 'held to maturity (HTM)' and their weight was so large that they reached about 46% of total assets as of March 2022. When the Fed raised rates sharply in 2022, the market value of these bonds plunged, and unrealized losses reached about $18 billion as of the end of 2022.
If you hold a bond to maturity you get your principal back, but if you have to sell in between, you lock in a loss at the price that fell due to rising rates. SVB had to sell these bonds to meet deposit withdrawals.
A 44-Hour Bank Run
On March 8, 2023, SVB announced it would sell available-for-sale bonds at a loss of about $1.8 billion and raise capital. As this announcement was read as a signal that 'the bank is in trouble,' closely connected venture and startup depositors began pulling deposits simultaneously through group chats and social media.
In the digital age, the deposit run was instant. SVB collapsed in about 44 hours, recorded as the largest U.S. bank failure since 2008.
The Lesson — Interest Rate Risk and Depositor Protection
The SVB episode shows that even government bonds, a 'safe asset,' can generate large valuation losses when rates surge. Longer-maturity bonds are more sensitive to rate changes.
Also, most of the deposits were large deposits exceeding the depositor protection limit (then $250,000), so depositors fled faster, which amplified the crisis. For individual investors, the lesson is that checking the limits and products covered by depositor protection is a basic safeguard.
常见问题
Q. Aren't government bonds risk-free assets?
U.S. Treasuries have very low 'risk of not getting your principal back (credit risk),' but they do carry 'the risk that prices fall when rates rise (interest rate risk).' If you hold to maturity you get your principal, but if you have to sell in between you can take a loss. SVB failed to manage this interest rate risk.
Q. Is my deposit safe?
In Korea, the depositor protection system protects principal plus interest up to a set limit per person, per financial company (the limit may change as the system is revised, so it needs to be checked). Investment products are not covered by depositor protection. It is important to distinguish between the protection limit and the products it covers.
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