Board of Governors of the Federal Reserve System

Evolution of Silicon Valley Bank

Overview

Silicon Valley Bank Financial Group (SVBFG) was founded in 1983 and was headquartered in Santa Clara, California. Prior to its failure, SVBFG was a financial services company, financial holding company, and bank holding company with approximately $212 billion in total assets.²⁷ SVBFG's principal subsidiary was Silicon Valley Bank (SVB), a California state-chartered bank with approximately $209 billion in assets (figure 2) that was a member of, and supervised by, the Federal Reserve System (i.e., state member bank).²⁸ While SVBFG had both U.S. and non-U.S. subsidiaries, SVBFG primarily operated in the U.S. and offered commercial and private banking products and services through SVB. SVBFG derived substantially all of its revenue from U.S. clients, and approximately 80 percent of its employees were based in the United States.²⁹

SVBFG provided financial services to both emerging growth and mature companies in the technology and life sciences sectors, with a focus on attracting early-stage or start-up companies as clients and retaining those companies as clients as they grow through the various stages of their life cycles.³⁰ According to its website, SVBFG provided banking services for "innovators, entrepreneurs, and investors," including "nearly half [of] U.S. venture-backed technology and life sciences companies."³¹ As a result, SVBFG's client base was heavily concentrated in venture capital-backed (VC-backed) and early-stage start-up firms.

SVBFG's Rapid Growth

At year-end 1983, SVB's assets were approximately $18 million, and SVBFG grew gradually through 2019.³² Between 2019 and 2021, SVBFG tripled in size. According to SVBFG's earnings release, 2021 was an "exceptional year of growth driven by outstanding client liquidity"³³ during which low interest rates were an amplifying factor.³⁴ SVBFG attributed its deposit growth to clients "obtaining liquidity through liquidity events, such as IPOs, secondary offerings, SPAC fundraising, venture capital investments, acquisitions, and other fundraising activities—which during 2021 and early 2022 were at notably high levels."³⁵

While low interest rates and more-frequent client funding events affected all financial institutions and their clients, SVBFG saw an outsized impact because of its concentration in venture capital and start-up clients, and SVBFG invested these deposits in long-dated securities. SVBFG's assets grew 271 percent from year-end 2018 to year-end 2021, compared to 29 percent for the banking industry (figure 3). Asset growth slowed dramatically in 2022 as tech-sector activity slowed in a rising-interest-rate environment.

SVBFG and the Tech Sector

SVBFG's customer base was heavily concentrated in VC-backed technology and life sciences companies. VC-backed companies accounted for more than half of SVBFG's deposits at year-end 2022, and client funds that SVBFG placed off-balance-sheet were even more concentrated in the same client group (figure 4).³⁶ This concentration linked SVBFG's funding growth directly to VC deal activity. As VC deal activity boomed in 2021 and early 2022 (figure 5), SVBFG's clients received investment proceeds, which were then deposited at SVB, increasing SVBFG's deposit levels (figure 6).

In the second half of 2022, VC activity fell sharply as part of a broader pullback in tech investment, which was driven by lower investor risk appetite as interest rates rose and concerns about the economy increased. Slower funding for VC-backed clients led to slower inflows into SVBFG's client accounts. In addition, SVBFG management stated that client fund balances were negatively affected by an increase in deposit outflows as clients withdrew more cash to fund their business operations.³⁷ Further, the majority of SVB's deposits were uninsured (figure 7). As of year-end 2022, approximately 94 percent of SVBFG's total deposits were uninsured.³⁸

SVBFG chose to invest a large portion of client deposits in long-dated, held-to-maturity (HTM), government or agency-issued mortgage-backed securities (agency MBS) (figure 8). These securities are low risk from a credit perspective and provide a predictable return based on the interest rate at the time of purchase. As of December 31, 2022, SVBFG's total HTM securities portfolio had a weighted-average duration of 6.2 years, and the majority of SVBFG's HTM portfolio consisted of agency MBS with a maturity of 10 years or more.³⁹

To be classified as HTM, securities must be purchased with the intent and ability to be held until maturity. Classification as HTM enables the securities booked in this fashion to be carried at amortized historical cost rather than at their fluctuating mark-to-market value. Generally, if a bank sells a portion of its HTM portfolio, the entire portfolio would be required to be reclassified as AFS and marked to market. In view of this accounting constraint and the large growth that had occurred in its HTM portfolio, SVBFG was limited in its ability to adjust its portfolio as the rate environment changed. In 2022, as interest rates began to rise, SVBFG saw a rapid increase in unrealized losses on both its HTM and available-for-sale (AFS) portfolios (figure 9).⁴⁰

SVBFG Relative to Peers

SVBFG's tech-focused business model made it an outlier relative to its peers in terms of growth, funding mix, and composition of the balance sheet (table 1). As of year-end 2022, SVBFG's securities portfolio as a share of total assets was more than double the large banking organization (LBO) peer group, and SVBFG's HTM portfolio, as a percentage of total securities, was also nearly double that of the average LBO. SVBFG's uninsured deposits as a percentage of total deposits were more than double the LBO average. At the same time, SVBFG's common equity tier 1 capital ratio (12 percent) was 200 basis points higher than the LBO average (10 percent).⁴¹

Table 1. Peer comparison, 2022:Q4

SVB's Failure

In 2023, SVB's deposit outflows accelerated as clients burned through cash, according to SVBFG public documents. Concerns increased following a Financial Times article that highlighted SVBFG's large securities portfolio.⁴² On March 8, SVBFG announced a restructuring of its balance sheet, including a completed sale of $21 billion of AFS securities for a $1.8 billion after-tax loss and a planned equity offering of $2.25 billion. SVBFG also guided investors to expect lower growth and income for fiscal year 2023 amid continued slowdown in tech sector activity.⁴³ SVBFG noted that the credit rating agencies Moody's and S&P were considering negative ratings actions. In an accompanying message to investors, management cited its expectation for "continued slow public markets, further declines in venture capital deployment, and a continued elevated cash burn" as pressuring 2023 earnings performance.⁴⁴ Moreover, on March 8, Silvergate Capital Corporation announced an intention to wind down operations and voluntarily liquidate Silvergate Bank, which further affected depositor sentiment.⁴⁵

Uninsured depositors interpreted SVBFG's announcements on March 8 as a signal that SVBFG was in financial distress and began withdrawing deposits on March 9, when SVB experienced a total deposit outflow of over $40 billion. This run on deposits at SVB appears to have been fueled by social media and SVB's concentrated network of venture capital investors and technology firms that withdrew their deposits in a coordinated manner with unprecedented speed. On the evening of March 9 and into the morning of March 10, SVB communicated to supervisors that the firm expected an additional over $100 billion in outflows during the day on March 10. SVB did not have enough cash or collateral to meet the extraordinary and rapid outflows. The California Department of Financial Protection and Innovation (CDFPI) closed SVB on the morning of March 10 and appointed the FDIC as receiver.

SVBFG's rapid failure can be linked directly to its concentration in uninsured deposit funding from the cyclical technology and VC sector and, as discussed elsewhere in this report, the failure of SVBFG's board and management to manage the liquidity and interest-rate risk that was assumed by SVBFG. SVBFG benefited from the record-high deposit inflows during rapid VC and tech sector growth, supported in part by a period of exceptionally low interest rates. SVBFG invested those deposits in longer-term securities and did not effectively manage the interest-rate risk, including actively removing hedges as rates were rising. At the same time, SVBFG failed to manage the risks of its liabilities, which proved much more unstable than anticipated. Deposit outflows from increasingly cash-constrained tech and VC-backed firms quickly accelerated as social networks, media, and other ties reinforced a run dynamic that played out at remarkable pace.

External Views

The broader market followed these trends. SVBFG's equity price (ticker "SIVB") peaked on November 15, 2021, and declined through year-end 2022 as tech sector activity slowed, unrealized losses accumulated, and depositor growth slowed (figure 10). Until SVBFG's announced restructuring actions on March 8, 2023, however, SVBFG's equity price had been relatively stable before deteriorating sharply following the balance sheet restructuring. As of March 1, 2023, most equity analysts covering SIVB rated SVBFG a "Buy" (12) or "Hold" (11) vs. "Sell" (1).⁴⁶ Data from FINRA, however, show rising short interest beginning in April 2022, which roughly coincides with when SVBFG began to accumulate substantial unrealized losses.⁴⁷

The credit rating agencies had a generally stable outlook on both SVBFG and SVB, and ratings stayed stable from 2015 until March 2023. Prior to March 2023, Moody's last changed SVBFG's rating in 2007. As part of the March 8, 2023, announcement of the balance sheet restructuring, SVBFG acknowledged the possibility of negative ratings actions by Moody's and S&P.

 

References

 

 27. Total assets as of December 31, 2022. See SVBFG, 2022 10-K, 63, February 24, 2023, https://ir.svb.com/financials/sec-filings/sec-filings-details/default.aspx?FilingId=16435322. Return to text

 28. See Federal Financial Institutions Examination Council, National Information Center, https://www.ffiec.gov/npw/Institution/Profile/802866?dt=20151231. Return to text

 29. According to SVBFG's 2022 10-K, SVBFG derived less than 10 percent of its total revenues from foreign clients for each of 2022, 2021, and 2020, and approximately 20 percent of SVBFG's employees were in international locations, including the United Kingdom, Denmark, Germany, Ireland, Israel, China, Hong Kong, India, Sweden, and Canada. SVBFG, 2022 10-K, 8–9. Return to text

 30. SVBFG, 2022 10-K, 32-33. Return to text

 31. SVBFG, Corporate Overview, October 2022, 5, https://www.svb.com/globalassets/library/uploadedfiles/svb_corporate_overview_q3_2022.pdf. Return to text

 32. Data derived from SVB's Consolidated Reports of Condition and Income (Call Report) on Federal Financial Institutions Examination Council's Form FFIEC 041. Return to text

 33. See SVBFG, SVB Financial Group Announces 2021 Fourth Quarter and Full Year Financial Results (2021 Fourth Quarter Financial Results), 1, January 20, 2022, https://s201.q4cdn.com/589201576/files/doc_financials/2022/01/4Q21-Earnings-Release-FINAL.pdf. Return to text

 34. SVBFG, Q4 2021 Financial Highlights, 8, January 2022, https://s201.q4cdn.com/589201576/files/doc_presentations/2022/01/01/Q4_2021_IR_Presentation_vFINAL.pdf. Return to text

 35. SVBFG, 2022 10-K, 32. Return to text

 36. See SVBFG, SVB Financial Group announces 2022 Fourth Quarter Financial Results, 6, January 19, 2023, https://s201.q4cdn.com/589201576/files/doc_financials/2022/q4/4Q22-SIVB-Earnings-Release-Final.pdf. "Off-Balance sheet client investment funds," including sweep money market accounts, third-party funds managed by SVB, and repo investments, are "maintained at third-party financial institutions."  Return to text

 37. SVBFG, Strategic Actions/Q1 '23 Mid-Quarter Update, 16, March 8, 2023, https://s201.q4cdn.com/589201576/files/doc_downloads/2023/03/Q1-2023-Mid-Quarter-Update-vFINAL3-030823.pdf. Return to text

 38. Data derived from SVB's December 31, 2022, Call Report and SVBFG's December 31, 2022, Consolidated Financial Statement for Holding Companies (Form FR Y-9C). Return to text

 39. SVBFG, 2022 10-K, 66. Return to text

 40. "Unrealized gains or losses" refers to the difference between the value of the security at the time of purchase and the price of the security today, if it were sold on the market. Since HTM securities are meant to be held until maturity, any decline in the value from the purchase date is considered an unrealized loss. While unrealized losses must be disclosed in financial statements, they do not change the assets' value on the balance sheet itself. Return to text

 41. Data derived from SVBFG's December 31, 2022, FR Y-9C. Return to text

 42. Tabby Kinder, Dan McCrum, Antoine Gara, and Joshua Franklin, "Silicon Valley Bank Profit Squeeze in Tech DownturnAttracts Short Sellers," Financial Times, February 22, 2023, https://www.ft.com/content/0387e331-61b4-4848-9e50-04775b4c3fa7. Return to text

 43. See SVBFG, Strategic Actions/Q1 '23 Mid-Quarter Update, 17, 19. Return to text

 44. SVBFG, Message to Stakeholders Regarding Recent Strategic Actions Taken by SVB, March 8, 2023, https://s201.q4cdn.com/589201576/files/doc_downloads/2023/03/r/Q1-2023-Investor-Letter.FINAL-030823.pdf, 3. Return to text

 45. Silvergate Capital Corporation, "Silvergate Capital Corporation Announces Intent to Wind Down Operations and Voluntarily Liquidate Silvergate Bank," news release, March 8, 2023, https://ir.silvergate.com/news/news-details/2023/Silvergate-Capital-Corporation-Announces-Intent-to-Wind-Down-Operations-and-Voluntarily-Liquidate-Silvergate-Bank/default.aspx. Return to text

 46. Source: Bloomberg. Return to text

 47. See FINRA, Equity Short Interest Data, https://www.finra.org/finra-data/browse-catalog/equity-short-interest/data. Return to text