Silicon Valley Bank Collapse: A Banking Drama in Three Acts

Amias Gerety, partner at FinTech VC firm QED Investors, watched the collapse of Silicon Valley Bank just like the rest of us. His assessment of what really happened, and where we go from here, is shaped by a perspective few of us have. In 2010, Gerety served as Deputy Assistant Treasury Secretary tasked with assembling the Financial Stability Oversight Council, a Dodd-Frank requirement after the 2008 financial crisis. FSOC’s mandate is to monitor the risks that could compromise the safety and soundness of our financial system — and to identify emerging threats that could create the kind of systemic risk that hobbled SVB and Signature Bank and has put the future of First Republic Bank and many regionals on shaky ground.

Today, thirteen years later, with on-the-ground experience in both the private investing and regulatory arenas, Gerety is equipped to answer the obvious question: what did we miss?

“I’m not sure we missed anything,” Gerety told Karen Webster in a recent conversation, despite the red flags and warning signs. “The risk that brought down Silicon Valley Bank is pretty simple — and you can think of [the downfall] in three Acts.”

It’s a three-act play we are all watching in real time.

Act One: A Dominant Bank — for a Single Community

Gerety said that SVB looked and acted like a community bank, albeit a pretty big one. The community bank business model aims to be the dominant FI for a relatively narrow segment or segments of customers and geographies, as opposed to the broad reach of the trillion-dollar behemoths.

SVB checked that box for the tech industry over the course of several decades.

The flip side of the community bank business model is that failure can be swift and irreversible if something happens that affects all of deposit holders at the same time. The bank can felled by the disproportionate losses caused by outside pressures.

Witness the slew of Texas banks and S&Ls that went bust in the 1980s as a result of the oil boom that went bust.

In 2023, several outside pressures created the SVB perfect storm: banking half of the country’s startups at the same time the tech community grappled with rising costs of capital, while creeping interest rates lit a fire of cash burn in a sea of elusive profits. The VCs backing those startups and banking with SVB felt the pressures, too.

“Firms raise money, and then they spend it hopefully over a two- to three-year period as [startups] hit their next milestone, and then they will raise more money eventually,” Gerety explained.  The hope is that being unprofitable for a period of time, while investing in software and innovation, will create a disproportionately important company in a short amount of time.

For SVB, that startup runway and SVB assets were wildly mismatched. Gerety says that it “potentially” should have been obvious from a forward-looking perspective that the proper duration of an asset at Silicon Valley Bank should have been closer to two or three years as SVB’s client firms raised money, burned through it and had to draw down deposits. He said that the concentration of the deposit base wound up being a critical component in SVB’s downfall.

Read more: The Silicon Valley Bank Story No One Has Told

Act Two:  Interest Rates Risk

The second act, he said, is interest rate risk, a risk that Gerety explained is not idiosyncratic to SVB.

“[Interest rate risk] affects the entire banking system,” he said. “It affects the cost of money, it affects bond portfolios, it affects loan portfolios.” As is well known by now, soaring interest rates depressed the value of Silicon Valley Bank’s holdings, and it sold government bonds at a significant loss in order to try to raise capital.

It tried to raise funds to cover the losses but was unsuccessful. That’s when $42 billion dollars ran out the door.

Act Three: The Bank Run

The unsuccessful scramble to raise capital gave way to the third and final act — the bank run that proved inescapable, irreversible.  There’s been a lot of discussion about whether, as Gerety put it, this was a Twitter-fueled bank run. Clearly, the online frenzy — the equivalent of yelling “fire” in a crowded movie theatre — might have been a catalyst.

“But the fundamental truth,” said Gerety, “is that it doesn’t really matter whether those runs take place over a day or a week or even a month.” The banks facing a run simply do not survive the drawdown of deposits if those drawdowns are significant enough (and in some cases, depositors try to get everything out of the bank).

Which is precisely what many VCs told their portfolio companies to do — and they did.

The Deposit Guarantee Debate — a Matter of Policy

Between the collapse of SVB on Friday, March 10 and the opening of business on Monday March 13, the government stepped in and said they would guarantee all deposits, irrespective of the $250,000 FDIC insurance limits. The debate over whether the government should have let SVB fail — or was correct in backstopping uninsured depositors — will be had over the weeks, months and probably years to come.

He also says that what the government did by backstopping deposits stopped short of a bailout, in the textbook sense of the word. Depositors were made whole, but shareholders and bondholders were not, and management lost their jobs.

Gerety posits that there’s no way of knowing how deeply the losses would have reverberated beyond the $250,000 insurance caps, how much of the uninsured deposits would ultimately have been recovered and who would have borne those losses most heavily among the SVB client base.

Clearly, for months — maybe years — SVB depositors would have been in the dark about how much money they had, or didn’t have, and how much of it they’d eventually recover.

Although he notes that it’s “fair to be angry” at those who precipitated the bank run and received money back while the bank fell, Gerety said that the more damaging outcome — from a banking perspective — would be for CFOs and small businesses to have to forever worry about the strength and stability of their banks.

The backstop was necessary to stem a potentially much larger financial crisis by proving that businesses can do business with American bank.

Now What?

Public policy and regulatory actions have always been, and must be, based on the guiding principle that a strong banking system has to be in place in order to have a strong economy. The risk of moral hazard, he said — where everyone assumes they’ll get bailed out so no one really watches out for risk — is slight. In the end, mismanagement will wind up costing bank CEOs and executives and boards their jobs, just like we saw with SVB.

Though we don’t know what will happen over the next several months — and it’s too early to tell what the legislative picture looks like — Gerety emphasizes that “the financial system [in the US] is stable.”

The real policy debate going forward, Gerety said, is what to do now that we’ve realized that the $250,000 deposit “cap” on insured funds does not work for business in the U.S.?

“That’s a real policy challenge,” Gerety told Webster.

One idea is to charge for deposit insurance, perhaps on a risk-adjusted framework — that function is already in place at the FDIC. Gerety noted that this could be a simple and effective (if imperfect) policy shift.

Separately, there’s also a need to examine the risks and regulations governing regional banks, he said, and whether laws passed during the Trump  administration — which made it harder to regulate banks of SVB’s size — should still stand.  Gerety also believes that there needs to be a closer examination of the deposit base at smaller and mid-sized banks.

Moving forward, there’s potential for FinTechs and FIs to work together to help provide banking infrastructure that can mitigate the risks that snared SVB, allowing depositors the ability to diversity their accounts across multiple financial institutions.

“Diversification is the name of the game,” Gerety said.