The sudden collapse of Silicon Valley Bank (SVB) has reignited urgent conversations about bank liquidity risk across the financial sector. While some may dismiss the event as a one-off failure tied to tech startups or crypto exposure, the reality cuts much deeper. SVB’s downfall underscores systemic issues that many institutions face—rising interest rate pressure, liquidity mismanagement, and dangerously high concentrations of uninsured deposits.
This wasn’t just a Silicon Valley mishap. It was a clear warning sign—a canary in the banking coal mine—of what can happen when liquidity risks are underestimated in a rapidly shifting economic landscape.
What Went Wrong at SVB?
At a high level, SVB’s strategy wasn’t outrageous. They catered to startups and venture capital firms, making them a niche but highly influential institution. The trouble began when SVB announced a $1.8 billion loss from selling off a large portion of its available-for-sale securities, alongside a plan to raise $2 billion in capital. These moves, while technically prudent, triggered panic among depositors and investors.
In a matter of hours, a modern-day bank run unfolded. Venture-backed startups, advised by their investors, began withdrawing funds en masse. SVB couldn’t keep up with the outflows, and regulators stepped in quickly to shut things down.
It’s easy to point fingers, but this wasn’t a case of poor credit risk. Instead, it was a mismatch of timing, liquidity management, and depositor concentration. The bank’s portfolio included too many long-dated bonds yielding low interest in a sharply rising rate environment. When they needed liquidity, selling those bonds meant locking in significant losses.
The Interest Rate Trap
Years of near-zero interest rates led many banks to stretch their investment horizons. When capital was cheap and deposit growth was steady, locking up funds in longer-duration securities seemed like a smart play.
But as interest rates spiked in response to inflation, those long-term assets lost value. Banks that relied too heavily on these positions were caught off guard. SVB wasn’t alone in this—many financial institutions now carry large unrealized losses on their books.
The difference is that most banks haven’t faced the same acute liquidity stress. Yet.
Deposit Concentration: A Hidden Risk
One of the most striking elements of SVB’s collapse is the role that uninsured deposits played. Only 5% of the bank’s deposits were insured. That means the vast majority—mainly large corporate accounts from startups and VC firms—were at risk the moment confidence faltered.
Unlike retail customers with diversified income streams and modest account balances, SVB’s depositors were closely tied to the same volatile ecosystem. When one domino fell, the rest followed quickly.
This illustrates an underappreciated risk in banking today: deposit homogeneity. When your entire base behaves the same way during a crisis, there’s no buffer. It’s a textbook case of how liquidity risk and reputation risk can feed each other rapidly.
Bank Liquidity Risk: Learning from History
If banking history teaches us anything, it’s that abundance—not scarcity—often leads to failure. Time and again, banks flush with deposits have made aggressive moves to deploy capital, often at the expense of safety. Whether it’s long-term bonds, speculative real estate, or high-yield assets, the motivation is the same: chasing yield to offset low loan demand.
And time and again, these bets come undone when the economic tide shifts.
From the savings and loan crisis of the 1980s to the Great Depression, banking failures have followed predictable patterns. An influx of deposits, poor duration matching, and a shock to the system—whether policy-driven or market-induced—create a chain reaction. SVB fits that pattern almost perfectly.
The Myth of the Innovative Bank
In the rush to explain SVB’s failure, some commentators have pointed to its association with startups and tech culture. But innovation itself wasn’t the problem. In fact, banks that rush to be “first movers” in new areas often stumble. History is littered with examples of banks that embraced flashy tech or new service models only to falter because they ignored the basics.
A stable balance sheet. Prudent risk management. Thoughtful duration strategy. These aren’t buzzworthy concepts, but they are the backbone of long-term banking success.
Ironically, the most “boring” banks—those focused on steady, conservative growth—often weather crises best.
Silvergate and the Perils of Specialization
SVB wasn’t the only bank to go down this path. Silvergate, a much smaller institution, faced a similar fate. They too catered to a niche—crypto firms—and built their balance sheet around serving that ecosystem.
Like SVB, Silvergate had plenty of deposits and a seemingly low-risk portfolio. But their customer base was highly concentrated and extremely volatile. When confidence in crypto faltered, deposits vanished. Despite efforts to stabilize with borrowing and asset sales, the bank ultimately opted for voluntary liquidation.
Both cases highlight a key lesson: diversification matters—not just in assets, but in depositors too.
The Role of Regulation
It’s tempting to place blame on regulators, or to call for new rules in the wake of these failures. But history suggests that regulatory responses often cause the second wave of problems. In past banking crises, initial failures were followed by well-intentioned but disruptive policy shifts.
That doesn’t mean regulation is bad. It just means it must be thoughtful and forward-looking. Panic-driven rules can make things worse.
What’s needed now is a sober reassessment of how banks manage liquidity, duration, and depositor risk. Supervisors and boards alike should revisit stress-testing assumptions, especially around the speed of deposit outflows and asset sales.
What Banks Should Do Now
If there’s one clear takeaway, it’s this: now is the time to get back to basics. Banks should:
- Review deposit concentrations and assess flight risk.
- Diversify their funding sources where possible.
- Rebalance portfolios to reduce duration exposure.
- Strengthen contingency funding plans.
- Stress test for faster-than-expected liquidity events.
Raising capital while it’s still available may also be wise. Waiting until it’s needed could be too late, as SVB found out the hard way.
A Stable System, But No Room for Complacency
Despite the headlines, the U.S. banking system remains robust. The vast majority of banks are well-capitalized, diversified, and supervised. The FDIC and other regulators have the tools to contain systemic risks.
Still, the SVB failure should be a wake-up call. It reminds us that even well-regarded banks can falter if they ignore fundamental principles. It’s a lesson in humility for an industry that prides itself on managing risk.
The true risk isn’t in innovation—it’s in forgetting the basics.
