SVB bank’s business model is straightforward: people deposit cash, and the bank loans money to others or invests in securities for higher interest returns.
As Silicon Valley grew, so did SVB’s deposits, which rose from $76 billion in June 2020 to $190 billion in December 2021. To maximize returns, SVB invested in long-term assets such as Treasury bonds and MBS, which offered high yields but low liquidity. This strategy worked well until early 2022, when the Fed’s interest rate hike caused the present value of SVB’s securities to drop, resulting in unrealized losses. Silicon Valley companies couldn’t raise cheap money and needed to withdraw cash from SVB to keep functioning.
As a result, SVB had to sell securities to handle withdrawals, causing realized losses on the balance sheet. This triggered a bank run, and people withdrew more money in panic. SVB needed to sell more securities to cover withdrawals, leading to further losses, that ultimately drained SVB’s liquidity and led to bankruptcy.
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