Silicon Valley Bank was shut down by the Federal Deposit Insurance Corp. on Friday, March 10, for running out of money. It is of course bad for a bank to run out of money. But it is also a little hard to understand how a bank like SVB could have run out of money, in the US, in 2023. The structure of the modern banking system is supposed to prevent that, and SVB seemed in some ways like a bank that was particularly unlikely to run out of money. But it did.
The very stylized facts of SVB
are that it had about $190 billion of deposits and invested much of that money — call it $120 billion — in a portfolio of mostly Treasury and agency bonds. The rest was invested in more complicated, riskier, traditional banking assets (loans, etc.), but SVB actually did relatively little lending
, for a bank, and had rather a lot of safe bonds.
Of course those bonds turned out to be risky
, too, since interest rates went up, the market value of the bonds declined, the bank became insolvent on a mark-to-market basis, depositors noticed, and there was a run on the bank. About $42 billion of deposits fled
on SVB’s worst day, Thursday, March 9, leaving the bank with “a negative cash balance of approximately $958 million”; it closed the next day. Fine. But SVB had invested about $120 billion in high-quality liquid bonds, and even after rates went up and the bonds lost value, they were probably still worth about $100 billion. But losing $42 billion of deposits broke the bank. These numbers are imprecise, they don’t account for outflows prior to that Thursday, etc., but still, 100 is a lot more than 42. If you have $100 billion of Treasuries, you can probably use them to acquire much more than $42 billion of cash.
You can sell them, for instance, though that might take a while. But more to the point you can borrow against them
; you can post them as collateral to a lender to get cash. In particular, in modern banking systems, a bank can post Treasuries as collateral to borrow money from its lender of last resort, the central bank (in the US, the Federal Reserve); the Fed can just create
money, so lending billions of dollars against good collateral is no sweat for it. In the US, there is also a “lender of next-to-last resort
,” the Federal Home Loan Bank system, which will also lend cash to banks with Treasuries as collateral. If Silicon Valley Bank had had $190 billion of deposits and $190 billion of weird bespoke risky small-business loans, it might have had a hard time borrowing $42 billion against those loans to pay out fleeing depositors. But it had $100 billion-ish of simple high-quality Treasury and agency bonds, so it’s a little weird that it couldn’t find $42 billion.
These numbers are all approximate and hand-wave-y, and you could imagine a reasonable explanation like “sure it lost $42 billion of deposits that day, but it lost billions in the previous days too, and even if it had been able to borrow the $42 billion it would have lost billions more the next day, so the Fed and FHLB pulled the plug when they saw it was hopeless.” And I have vaguely assumed that was the explanation for why SVB couldn’t get the money to pay out its depositors.
But today at the Wall Street Journal Hannah Miao, Gregory Zuckerman and Ben Eisen have the actual, horrifying explanation
, which is that the Fed’s computers go to bed at 4 p.m. and you can’t wake them up until the next morning:
Withdrawals accelerated late in the morning on the West Coast on Thursday, March 9. Executives paced the office on phone calls as employees watched and texted details to each other.
That is when SVB, at the time controlled by SVB Financial Group, started looking for help, only to run into the U.S.’s bank-funding system, which wasn’t built for speed. First it turned to the San Francisco Federal Home Loan Bank, asking for a $20 billion loan. …
It was already midday in California, and SVB’s unusually large request came too late for the San Francisco FHLB to process that day, people familiar with the matter said. It offered SVB a smaller loan but the bank turned that down, the people said.
SVB turned to plan B, asking the San Francisco FHLB to move $20 billion of collateral to the Federal Reserve’s discount window, where it could get emergency funding, the people said. SVB had roughly $20 billion available for financing at the San Francisco FHLB, according to the people familiar with the matter.
The bank hit another roadblock. The transfer required procedural steps. SVB had outstanding loans at the San Francisco FHLB, which had to determine how much collateral it needed to hold, the people familiar with the matter said.
SVB also tried to get $20 billion in assets to the Fed through Bank of New York Mellon Corp., one of its custodial banks. SVB was too late—it had missed BNY Mellon’s daily cutoff for instructions for Fed transfers from custodial accounts.
BNY tried to extend its cutoff, but:
The Fed needed a test trade to be run before the actual transfer could occur. That took time and the Fed didn’t extend its own daily deadline of 4 p.m. PT for collateral transfers to help SVB. Time ran out on the bankers and SVB couldn’t get the money that day.
It did get the money the next day, but by that point the FDIC had already seized it. Now, again, even if it had
gotten the cash, it was facing continuing deposit flight, it seems to have been economically insolvent and it probably would not have survived the weekend. The Journal notes:
Some people at SVB remain angry about the takeover and frustrated that a possible rescue took so long. They say the bank was seized just before it got a lifeline from the Fed or a buyer, but they also acknowledge that the scale of withdrawals doomed the bank.