Silicon Valley Bank: the asset and the funding
Documented sequence. Silicon Valley Bank failed in March 2023. The Federal Reserve’s subsequent review identified failures by management and the board to manage risk, alongside shortcomings in supervision. Rapid growth, concentrated funding, interest-rate exposure and a fast-moving run were central to its explanation. This is the regulator’s retrospective review, which also criticised its own supervisory approach. It is not a claim that all banks with securities portfolios face the same outcome.
Federal Reserve · SVB review, April 2023
Original analysis: one balance sheet, two clocks. An asset can promise payment years from now while a liability can be withdrawn today. The gap does not automatically cause failure; banking normally involves maturity transformation. It becomes dangerous when the cash available, the ability to borrow and the assets that can be sold are insufficient for the demand. The analyst needs both the asset’s economic value and the institution’s capacity to realise that value on time.
A high-quality bond has low expected credit loss relative to a weaker promise, but its market price can still decline when rates rise. If the holder can wait, the contractual payment may remain valuable. If the holder must sell immediately, the market price matters. The accounting label attached to the security does not determine whether a depositor waits. This is a general balance-sheet explanation, not a reconstruction of every security held by SVB.
Hypothetical worked example. A bank has £10 of cash and £90 of securities funded by £90 of deposits and £10 of equity. Customers request £30. Cash covers £10, leaving £20 to obtain. If securities can be sold for 80% of their carrying amount, the bank must sell £25 of carrying value to raise £20, crystallising a £5 difference. The simplified example ignores borrowing facilities, hedges and other cash flows. It shows why the size of the cash demand and the sale price interact.
Funding concentration adds a separate question. Ten thousand accounts are not necessarily ten thousand independent decisions if customers share an industry, advisers or cash-flow cycle. A balance sheet can look diversified by account count yet face correlated withdrawals. Conversely, a concentrated customer base is not by itself proof of imminent failure. The useful test combines concentration with liquidity, communication, asset sensitivity and available financing.
For stock investors, the distinction between depositors and shareholders is essential. Their claims occupy different positions and may receive different treatment in a resolution. Do not infer that protecting one group preserves the value of another. A bank share is a residual claim whose value depends on assets after liabilities and resolution outcomes. A reassuring statement about customer access to money is not automatically a statement about shareholder recovery.
A common misunderstanding is to reduce the story to either bad bonds or panicky depositors. Such a binary misses management choices and the interaction between asset risk and funding behaviour. Another is to assume that all unrealised losses are irrelevant because a security may eventually repay. They can affect confidence, collateral and the cost of obtaining cash before maturity.
Takeaway. Ask whether a stress scenario joins the asset and liability sides. A useful exercise changes interest rates and withdrawal demands together, then checks executable sources of cash. It should distinguish an accounting loss, an economic loss and an immediate payment shortfall. Those concepts overlap, but they answer different questions about whether an institution can continue operating.
Why might a portfolio of creditworthy bonds still be dangerous for a bank’s shareholders?
Rate sensitivity, thin equity and unstable funding can interact even without borrower default.
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