Silicon Valley Bank (SVB) was shut down in March 2023 by the California Department of Financial Protection and Innovation. Based in Santa Clara, California, the bank was shut down after its investments greatly decreased in value and its depositors withdrew large amounts of money, among other factors. Later in March, First Citizens Bank bought up all deposits and loans of the failed bank.

Bank failures like this have happened before—there were more than 550 banks shut down between 2001 and the start of 2023. But this one was particularly noteworthy. Not only did it come at a time when many people in the U.S. already feared a recession, but it was also the largest bank to fail since Washington Mutual closed its doors amid the financial crisis of 2008.

To help you understand what exactly went wrong with Silicon Valley Bank, we’ll dive a bit deeper into the history of the bank, the events leading up to the collapse, and what it means for depositors, investors, and the economy in general.

What Was Silicon Valley Bank?

Silicon Valley Bank (SVB), a subsidiary of SVB Financial Group, was the 16th largest bank in the United States. The bank had assets of about $209 billion in December 2022.

Silicon Valley Bank provided business banking services for companies at every stage, but it was particularly well-known for serving startups and venture-backed firms. According to the company’s website, 44% of the venture-backed technology and healthcare initial public offerings (IPOs) in 2022 were clients of Silicon Valley Bank.

History of Silicon Valley Bank

During a poker game, Bill Biggerstaff and Robert Medearis came up with the idea for Silicon Valley Bank. And in 1983, the two, along with the bank’s CEO Roger Smith, opened the first branch in San Jose, California. It went public in 1988 and, in 1989, moved to Menlo Park in an effort to cement its presence in the venture capital world.

Silicon Valley Bank eventually grew to be one of the largest commercial banks in the U.S. It saw major growth during and after the pandemic between 2019 and 2022, when it nearly tripled in size, rising in the ranks from the 34th largest bank to the 16th.

Why Did Silicon Valley Bank Fail?

Silicon Valley Bank saw massive growth between 2019 and 2022, which resulted in it having a significant amount of deposits and assets. While a small amount of those deposits were held in cash, most of the excess was used to buy Treasury bonds and other long-term debts. These assets tend to have relatively low returns but also relatively low risk.

But as the Federal Reserve increased interest rates in response to high inflation, Silicon Valley Bank’s bonds became riskier investments. Because investors could buy bonds at higher interest rates, Silicon Valley Bank’s bonds declined in value.

As this was happening, some of Silicon Valley Bank’s customers—many of whom are in the technology industry—hit financial troubles, and many began to withdraw funds from their accounts. 

To accommodate these large withdrawals, Silicon Valley Bank decided to sell some of its investments, but those sales came at a loss. SVB lost $1.8 billion, and that marked the beginning of the end for the bank.

Some people believe that Silicon Valley Bank’s failure started far earlier with the rollback of the Dodd-Frank Act, which was the major banking regulation that was put into effect in response to the financial crisis of 2008.

As a part of Dodd-Frank, banks with more than $50 billion in assets would be subject to additional oversight and rules. But the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, signed into law by President Donald Trump, significantly changed that requirement. Instead of setting the threshold at $50 billion, the 2018 law increased it to $250 billion.

Despite being the 16th largest bank in the country, Silicon Valley Bank didn’t have enough assets to be subject to the extra rules and oversight. If the threshold was never changed, SVB would have been more closely watched by regulators.

In a report issued on April 28, 2023, the Federal Reserve formally attributed blame for the bank's failure to SVB's senior management team for mismanaging the investment risk of their balance sheet as well as the board of directors for not performing its duty as a check on senior management. Additionally, the Fed also attributed some responsibility to its own regulatory officials for not recognizing the bank's vulnerabilities as it rapidly grew between 2019 and 2021 and for not acting on significant problems it did identify related to risk management before the bank failed. The Fed also cited the 2018 change in Fed supervisory standards and the impact of social media with a highly networked and concentrated depositor base as contributing factors.

A Timeline of the Collapse

From an outside perspective, the failure of Silicon Valley Bank happened rapidly over the span of just a couple of days. Here’s a timeline of events:

• March 8: Silicon Valley Bank announced its $1.8 billion loss on its bond portfolio, along with plans to sell both common and preferred stock to raise $2.25 billion. In the aftermath of this announcement, Moody's downgraded Silicon Valley Bank’s long-term local currency bank deposit and issuer ratings.
• March 9: The stock for Silicon Valley Bank’s holding company, SVB Financial Group, crashed at the market opening. Other major banks also saw their stock prices take a hit. Additionally, more SVB customers began withdrawing their money, for a total attempted withdrawals of $42 billion.
• March 10: Trading was halted for SVB Financial Group stock. Before the bank could open for the day, federal regulators announced they would take it over. After regulators were unable to find a buyer for the bank, deposits were moved to a bridge bank created and operated by the FDIC, with a promise that insured deposits would be available by Monday, March 13.
• March 12: Federal regulators announce emergency measures in response to the Silicon Valley Bank failure, allowing customers to recover all funds, including those that were uninsured.
• March 17: Silicon Valley Bank's parent company, SVB Financial Group, filed for bankruptcy.
  
• March 26: First Citizens Bank bought all of Silicon Valley Bridge Bank except for $90 billion of securities and other assets that remained in FDIC receivership.

Impact on Depositors and Investors

The FDIC insures bank deposits of up to $250,000 per depositor per bank for each account category. In other words, if you had $250,000 in a Silicon Valley Bank account, you would get all of your money back.

Unfortunately, most of the accounts in Silicon Valley Bank held more than $250,000 of deposits, meaning most of the funds were uninsured. In most cases, this would mean account holders would lose any money above that threshold.

To help, the Federal Reserve announced on March 12 that it would invoke a systemic risk exception, meaning that all depositors would be made whole, even for those funds that were uninsured.

However, investors won’t be so lucky. While the FDIC can protect depositors from losses, it can’t do the same for shareholders and unsecured debt holders. In other words, individuals and institutions that owned stock in SVB Financial Group may not get their money back.

Why Did the Government Promise to Make SVB Depositors Whole?

Federal regulators decided to fully insure and protect all of Silicon Valley Bank’s depositors and their balances for fear of contagion—the impact the bank’s collapse could have on the economy as a whole.

Amid the bank collapse, it was not just Silicon Valley Bank whose stock price plummeted. Other banks saw their stock prices drop too.

A high-profile bank failure like this one could reduce consumer confidence in the banking system. That lack of confidence could create more of the problem that contributed to Silicon Valley Bank’s failure—account holders rushing to withdraw deposits from a bank that doesn’t have the funds to cover them.

Ultimately, this risk of contagion could affect not just banks but the economy as a whole.

Who Paid for the Rescue?

When news spread of regulators’ decision to make all depositors whole, many immediately wondered what that would mean for taxpayers.

When the Federal Reserve made its announcement, it clarified that none of the losses would be taken on by taxpayers. Instead, the money will come from the FDIC, which is the agency tasked with insuring bank deposits. The money the FDIC uses to cover those losses comes from quarterly premiums that all insured banks pay to the agency.

The FDIC estimated on March 26, 2023, that the cost of the failure of SVB to its Deposit Insurance Fund would be about $20 billion.

But it would be too simplistic to say none of the losses will be borne by taxpayers. 

While you may not pay for the losses directly with your tax dollars, some losses could ultimately trickle down. For example, if your bank has to pay more for deposit insurance, it might charge you a higher interest rate on a loan or pay you a lower percentage of interest in your savings account.

What Is the Bank Term Funding Program?

As a result of the Silicon Valley Bank collapse, the government announced the Bank Term Funding Program (BTFP), a program authorized by the Federal Reserve that offers loans to banks, credit unions, and other deposit institutions.

These loans, which can last for up to one year, help financial institutions to meet their depositors' needs. The program also helps to ensure that, when banks need cash, they won’t be forced to quickly sell high-quality securities to get it.

The program went into effect on March 12, 2023, and will be in effect until at least March 11, 2024.

The Bottom Line

The collapse of Silicon Valley Bank in March 2023 represents the largest bank failure since the financial crisis of 2008. And given the already-present fears of a recession, the collapse further shook consumer confidence in the economy.

The bank’s failure served to remind us that there are several weaknesses within the banking system, including the lack of oversight for banks with less than $250 billion in assets.

Thankfully, federal regulators responded quickly to the collapse of SVB, implementing several measures to reduce depositors’ losses and renew confidence in the banking system and the economy overall.

Correction—April 21, 2023: A previous version of this article incorrectly referred to the first CEO of Silicon Valley Bank as Robert Smith. The correct name is Roger Smith.