Silicon Valley Bank was shut down by regulators on Friday, March 10, in the largest bank failure since 2008. The bank had $209 billion in assets at the end of 2022. Bank failures can come from various causes: fraud, bad lending or a mis-match of assets and liabilities. It appears that asset-liability mismatch was behind the bank’s problems.

A bank takes in deposits from customers, who could be individuals or businesses. Then it invests most of those deposits in loans or securities, but keeps some cash on reserve for when a depositor wants money back. Silicon Valley Bank was not your typical bank, which by itself is not a criticism. Most of their deposits came from large companies that were part of the tech sector. For example, a start-up receives $100 million from a venture capital fund. It parks that money at its local bank. Another company might have a treasurer who gets the best possible short-term interest rate by investing in commercial paper and other financial instruments. But the start-up’s chief financial officer is not hired to nurse an extra five basis points from the cash holding; the CFO has bigger issues to deal with and few staff members to help. So the CFO uses the bank.

The bank recognizes that this deposit base requires liquidity. Most banks put the bulk of their assets into loans, but most banks have many small depositors who won’t need their money suddenly. So Silicon Valley Bank put most of its asset into U.S. treasury securities. There is no credit risk, so it sounds safe.

Unfortunately, the best yields are usually found on long-term bonds rather than short-term bills. The problem with long-term bonds is that when interest rates rise, the value of old bonds, that still pay the old interest rate, goes down.

The Silicon Valley Bank’s parent company, SVB Financial Group, reported at year end 2022 that its bonds were worth $117 billion but had been purchased for $127 billion. And that value calculation edged south as interest rates rose. The 10-year treasury bond, for example, closed the year at 3.88% but hit 4.08% in early March. The rise in interest rates created an even larger loss for the bank.

Still, the publicly-available financials suggest to me that the bank was still solvent when it was closed—solvent but in trouble. The trouble came from the corporate depositors. FDIC insurance only covers deposits up to $250,000. A corporation with a $100 million in deposits is just an unsecured creditor. And it’s easy for a company to move its money from one bank to another, or to buy treasury bills or commercial paper. So when it appeared to the corporate depositors that Silicon Valley Bank was in trouble, the smart and easy response was to withdraw money.

As more money left the bank, it probably sold off securities. At some point, the bank would be left with illiquid assets: loans, leases, bank premises and equipment. Those assets have real value but cannot be converted into cash quickly, meaning that some depositors would not be able to get their money immediately.

The lessons of this bank failure apply to many companies, not just banks. First understand liabilities, especially how quickly creditors can demand repayment. Second, understand how quickly assets can be converted to cash to meet the creditors’ demands. Third, recognize that long-term assets usually lose market value when interest rates rise. As a result, danger lies in borrowing short-term to lend long-term. Bankers have learned that lesson before. But as the great sailor Bernard Moitessier once said, the best lessons in life must be learned many times.

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