Silicon Valley Bank, 2023

Long bonds, unhedged, funded by deposits that could leave in a day

Silicon Valley Bank tripled its deposits in two years, mostly from technology companies, and invested much of the money in long-dated US Treasuries and mortgage-backed securities just before interest rates rose sharply. It had removed most of the interest rate hedges on those holdings. By the end of 2022 its unrealised losses were close to its entire equity. When it announced a loss-making sale and a capital raise on 8 March 2023, depositors withdrew $42bn the next day, and regulators closed the bank on 10 March.

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What the lesson covers

1. What happened
2. The position
3. Why it broke
4. What it cost
5. What it teaches

Key terms

• Held to maturity — An accounting classification that carries bonds at amortised cost, keeping market losses out of reported capital.
• Duration — The sensitivity of a bond’s price to a change in yields, roughly the percentage price change per 1% move.
• Unrealised loss — The fall in an asset’s market value below its carrying value, not yet crystallised by a sale.
• Uninsured deposits — Deposits above the government insurance limit, whose holders have most reason to run.
• Interest rate swap hedge — Paying fixed and receiving floating to offset the fall in value of fixed-rate assets as rates rise.
• Bank run — Depositors withdrawing at once because they fear the bank cannot pay them all.

Every key term, A to Z

In practice

Supervisors now stress liquidity against faster, concentrated outflows, look at unrealised losses on held-to-maturity portfolios when judging capital, and scrutinise banks that unwind hedges into rising rates. Treasurers track uninsured and concentrated deposits as a liquidity risk and match the duration of their assets to how quickly their funding can leave.

Read next

• Interest Rate Swap — Trade fixed for floating payments
• DV01 and Rate Risk — What one basis point is worth
• The gilt LDI crisis, 2022 — Pension hedges that worked, and could not be funded

In the app, Silicon Valley Bank, 2023 carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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