The 2023 Regional Bank Failures

Silicon Valley Bank (SVB) was, by most conventional measures, well-capitalized in early 2023. It held mostly high-quality assets — US Treasuries and government-backed mortgage bonds — and its regulatory capital ratios looked fine. It failed anyway, in about 48 hours, because two ordinary and individually unremarkable features of its balance sheet combined into a run that moved faster than any bank had previously been designed to survive.

The two ingredients

A duration mismatch. During 2020-21, SVB took in a flood of deposits from venture-backed tech companies flush with cash, and invested a large share of that money in long-dated Treasury and mortgage bonds, then classified many of them as "held-to-maturity" — an accounting label meaning the bank doesn't have to mark them to market value each quarter as long as it intends to hold them to maturity. As rates rose through 2022 (see The 2022 Rates Shock and the 60/40 Drawdown), those long-dated bonds fell substantially in market value, an unrealized loss that sat off the headline capital numbers as long as the bonds weren't sold.

A concentrated, uninsured deposit base. SVB's depositors were mostly startups and venture funds, often with balances far above the $250,000 FDIC insurance limit, and heavily networked with each other through the same venture-capital community. This is not the diversified, largely-insured, sticky retail deposit base most bank runs are modeled against.

Date, Mar 2023	Event
8 Mar	SVB announces it sold $21bn of securities at a $1.8bn loss and will raise $2.25bn in capital to shore up its balance sheet
9 Mar	The announcement itself signals distress; venture-capital networks advise portfolio companies to withdraw funds; roughly $42bn in deposits leave in one day
10 Mar	Regulators close SVB — the second-largest bank failure in US history to that point
12 Mar	Regulators guarantee all SVB deposits, insured or not, to stop contagion; Signature Bank is also closed
Following weeks	First Republic Bank suffers a similar deposit run and is sold to JPMorgan in May

The mechanism

The unrealized bond losses were not by themselves fatal — a bank can hold bonds to maturity and recover the loss as they mature, as long as it never has to sell them early. What forced the sale was the deposit run: once depositors started leaving, SVB needed cash immediately, had to sell the held-to-maturity bonds to raise it, and the act of realizing the loss to raise that cash was what confirmed the very insolvency fear that was driving the run. A concentrated, well-informed, uninsured depositor base could coordinate and withdraw with unprecedented speed — largely electronically, with no need to queue at a branch — turning what might once have taken weeks into a single trading day.

The lesson

Regulatory capital ratios calculated on held-to-maturity accounting can understate a bank's true exposure to a forced sale, because the accounting treatment is contingent on an intention (to hold to maturity) that a deposit run can override. The speed of a modern bank run is also structurally different from the historical cases regulations were built around: instant transfers and coordinated communication among a networked depositor base compressed a process that used to take weeks into about two days. Regulators' response — guaranteeing all deposits, insured or not, to stop the run from spreading to other regional banks — mirrors the same "stop the fire sale spiral" logic seen in The UK Gilt and LDI Crisis and the emergency facilities of The 2008 Subprime and Housing Collapse, just applied to bank deposits instead of collateral markets.