From Hero to Zero – The Case of Silicon Valley Bank

The sudden collapse of Silicon Valley Bank (SVB) surprised many investors and industry experts, given the bank’s recent accolades and long-standing reputation as one of the best national and regional banks in the U.S.[1]Moreover, there had been no reported bank failures during the COVID-19 pandemic from 2020 to 2022. As the second-largest bank failure in U.S. history, the collapse of SVB has raised many questions about what went wrong and how such a successful institution could fail so unexpectedly.

Banks fail for a variety of reasons, including weak regulation, economic instability, poor corporate governance, and inadequate risk management. Following the 2008 financial crisis, the number of bank failures in the United States increased significantly. In 2010, there were 157 failures, the highest number since the savings and loan crisis of the 1980s and early 1990s. However, since then, the number has steadily declined. One possible reason is the regulatory reforms that were implemented after the financial crisis The Dodd-Frank Wall Street Reform and Consumer Protection Act, for example, introduced new regulations to increase capital and liquidity requirements for banks, as well as to enhance risk management practices. Additionally, the overall improvement of the economy and the banking industry’s recovery from the financial crisis have contributed to the decline in bank collapses.

In a recent paper, we investigate the collapse of SVB, analyzing the bank’s financial performance in the period 2019-2022. We show that the bank expanded significantly during that period, with total assets and total deposits tripling and total revenue and net income growing more than two-fold. However, the bank’s financial performance declined during the same period. For example, the average yield on earning assets declined from 3.83 percent in 2019 to 2.77 percent  in 2022, which was lower than for its peers. In contrast, the cost of funding earning assets increased from 0.30 percent to 0.55 percent, which was higher than for its peers. Consequently, both return on assets and return on equity decreased during the period.

An analysis of the bank’s balance sheet also reveals some important points. First, the bank’s equity capital ratio was 7.39 percent in 2022, significantly lower than its peers’ ratio of 9.34 percent. Second, the bank’s proportion of loans and leases to total assets dropped from 46.95 percent in 2019 to 35.22 percent in 2022, which was significantly lower than the industry average of 50.98 percent. In contrast, the total debt securities ratio increased from 39.68 percent to 56.12 percent. Third, SVB mainly depended on deposits to finance its assets. Although the deposit-to-total assets ratio decreased from 89.99 percent to 83.90 percent, it was still significantly higher than its peers’ ratio of 81.42 percent. Moreover, more than 94 percent of its deposits were uninsured.

A more detailed analysis of the bank’s financial statements uncovers that in 2021, when interest rates were very low, the bank invested more in debt securities, which accounted for 60.07 percent of total assets. The held-to-maturity (HTM) securities grew six-fold from 2019 to 2021, comprising 47.08 percent of total assets, while the available-for-sale (AFS) securities doubled during this period. At the end of 2021, the weighted average duration of its debt securities was 3.97 years. This figure increased to 5.7 years at the end of 2022, while the weighted average duration of the HTM securities was 6.2 years.

In early 2022, interest rates experienced a significant surge. For example, the yield on three-year Treasury Notes increased significantly from less than 1 percent at the end of 2021 to around 4.20 percent at the end of 2022. As a result of the interest rate hike, SVB was exposed to the risk of unrealized losses of at least $15.76 billion (equivalent to 12.61 percent of its $125 billion debt securities). This could have resulted in a negative market value of the bank’s equity capital by the end of the year. However, since the bank did not sell its securities, most of these potential losses were not realized.

Another weakness of SVB was the lack of diversification in its depositor base, as 89.38 percent of total deposits come from a small group of depositors primarily operating in the venture capital industry. Given the concentration of depositors, there was a higher likelihood that they knew each other. In the event of poor bank performance, there was a greater possibility that many depositors would withdraw their deposits at the same time because most of these deposits were uninsured, thus increasing the risk of a bank run.

The collapse of Silicon Valley Bank can, therefore, be attributed to several factors. First, SVB invested significantly in debt securities during a low-interest-rate period and did not properly hedge its risks, which resulted in losses after the recent surge in interest rates. Second, SVB had a highly concentrated depositor base, with a small group of depositors providing most of the bank’s funding, and a high proportion of uninsured deposits, increasing the risk of a bank run. Finally, SVB had significantly less equity capital than its peers, which further exacerbated the bank’s risk.


[1] Just a few weeks before SVB’s failure, it was named by Forbes as one of the best American banks based on its impressive growth, credit quality, and profitability.

This post comes to us from professors Lai Van Vo at Western Connecticut State University and Huong Thi Thu Le at Northeastern Illinois University. It is based on their recent article “From Hero to Zero – The Case of Silicon Valley Bank,” available here.